This article was originally published in late January — Andy Obermueller is teasing Apple suppliers again, hinting that the Apple “Growth Window” will close up on September 30 (presumably when we start freaking out about their next wave of iPhones and iPads, usually introduced around then), and the descriptions of the teased stocks that he likes are still pretty much identical, as is the general “Apple Pay” push, so we’re republishing the answers and explanations below.
The stocks are generally up since the beginning of the year, with the exception of SNDK, and the “sexier” suppliers (AVGO, NXPI, SWKS) are up quite dramatically — Qorvo has also become established as a new company since then and is clearly still being teased (QRVO is the combination RF Micro and Triquint), and Obermueller makes no mention of the Avago/Broadcom combination that was announced just a few days ago but still teases AVGO. What follows has not been updated, edited or revised since it was first published on January 23.
Apple is my largest personal equity holding, and that makes me a little bit worried again now about short-term jumpiness — it’s not an expensive stock, to be sure, but it is huge and often trades with wild volatility unbecoming a megacap dividend growth stock…
… and, perhaps more worrisome, I’ve had my first post-Steve-Jobs moment when I mourned the “old Apple.” I had it just a week or two ago, when Mrs. Gumshoe upgraded to the iPhone 6 (the regular one, not the behemoth Plus)… and I wasn’t jealous.
Now sure, I may end up upgrading to a new phone someday before too long… but I agree with Steve Jobs, the phone should fit nicely in your hand and be usable with one hand. I have big hands, I’m well over six feet tall and haven’t been below 200 pounds since high school, I’m used to being big… and I think her phone is too big for me.
I’m not selling Apple, of course, partly because I seem to be out of touch with the vast multitudes who prefer larger screens (everyone seems convinced that Apple is likely to announce having sold record numbers of iPhones again when they report next week), but I did hedge my bets with some cheap put options that may moderate my losses in case iPhone sales or margins are a bit weaker than the lofty expectations.
But more to the point, with Apple reporting what will probably be their biggest quarter ever next week, I thought we should take a look at the latest Andy Obermueller teaser pitch for the “New Apple Innovation” and the “#1 Apple Supplier to Buy Now.”
So what is it? We’ll let the ad copywriters whet your appetite:
“Apple has quietly released an innovation that will disrupt one of the world’s most powerful—and profitable—industries.Are you getting our free Daily Update
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“Here’s everything you need to know, plus 11 companies that could hand investors bigger profits than Apple….
“Apple is about to change the world as we know it… again. And this next Apple revolution will alter all of our daily lives forever.
“While the popular media has been distracted by the next gadget that Apple will reveal—like the iPad, the Apple Watch, and the next generation iPhone—they’re overlooking the real game-changer that Apple quietly released.
“Like all of Apple’s industry disruptions—from the home computer industry to the music industry to the telephone industry—this event will be extremely profitable for some investors.
“But Apple investors aren’t going to be the ones who profit the most.”
So it seems that we’re faced with another “Apple supplier” teaser pitch, a hook that’s been used to sell newsletters ever since Synaptics (SYNA) boomed when it was touted as the supplier for the click wheel on early iPods a decade ago. We see these a lot, from touts about the latest screens (Gorilla Glass from Corning) to the latest radios or other processors (Qualcomm or Skyworks Solutions or ARM Holdings) or the motion sensors or gyroscopes (Invensense or STMicroelectronics) or near field communication chips (NXP Semiconductor) or even the power amplifiers (Triquint Semiconductor)…. and I must be missing quite a few. I’m pretty sure all of those have been teased and touted over the past five or six years, and we’ve written, at least in passing, about most of them.
There’s a reason why everyone waits breathlessly as each new iPhone model is torn down right after release, wanting to see if their favorite little semiconductor firm has “won” a space inside that secretively-designed little machine. The companies sometimes end up regretting their Apple connection in their weaker moments, I suspect, much like small product developers sometimes regret getting that coveted OK from the Walmart buyers, because no one crushes the margins of their suppliers like Apple and Walmart do… but still, the promised potential of that huge volume and high profile presence in the hottest consumer product (or the largest retailer) is pretty much impossible to resist. And sometimes (Skyworks Solutions, for example) it works out really well for investors for an extended period of time.
And what is this next hot innovation? Apple Pay, Apple’s new system — built into the iPhone 6 and the Apple Watch — that lets you store credit card info in your phone and authorize payments using just a wave of your watch or phone at the cash register. I have to admit, this is one thing that I would jump on as a great convenience… if it really catches on and lots of retailers and banks sign on and install Apple Pay-ready checkout systems and authorize their credit and debit cards for use in the system (my small local bank hasn’t yet, nor have many retailers, large or small, in my neck of the woods here in Western Massachusetts).
The potential is certainly there for a “better” way to pay, a better wallet built into the cell phone or the key fob, and it’s been tantalizingly teased since well before the first iPhone. One of my fondest memories of visiting Disney World with the little Gumshoes last year was the “magic band” they give you — the size of a watch, it’s your park entrance ticket, your hotel room key, your credit card to buy lunch and trinkets, your ride ticket, and you don’t have to carry anything else. I should have bought Disney stock after that visit, which made me wish Disney could take over the DMV and the airport and even, please God, Walmart… but without regrets we’d all be insufferable.
I’ve gotten off track again. More from the ad:
“With Apple Pay, for instance, all you do is push down on a built-in fingerprint scanner as you hold your iPhone next to the cash register at your favorite store.
“And instead of transferring your personal information, this service sends a different set of numbers called a token, which is worthless to criminals.
“So even if they somehow hack a system, all they’ll get are a bunch of meaningless numbers.
“It’s that easy to use and that secure.
“And the timing is right for Apple Pay to radically change the way we pay for everything… by making credit cards obsolete over just the next few years.”
The idea, we’re told, is that Apple is muscling it’s way into the payments space because the volumes are so huge, and so dramatic, that even a teensy weensy little fee that they might be able to codge out of the banks and credit cared companies and retailers would amount to meaningful revenue for them… and of course, if they do it better than everyone else then even more people will be even more committed to sticking with Apple for their future phone needs.
“Put simply, Apple’s profit margin—the percentage of revenue it has left after it pays out most of its expenses—is about 22% right now. That’s very good.
“Now take a look at MasterCard and Visa’s profit margins.
“MasterCard’s profit margin, which stands at nearly 38%, is head and shoulders above Apple’s.
“And Visa’s is more than double Apple’s profit margin at nearly 45%.”
That’s probably not a meaningful comparison, of course — Apple already has fantastic margins, though they’re under some pressure and they’d probably like to boost them by a hair with more employee-light revenue… but it’s hard to believe that Apple trying to make big news in the payments business would come at high margins, at least in the first several years. They’re not going to get the higher fees that Visa and Mastercard do, since they’ll still need to use Visa and Mastercard (oligopolies do not die easily), and Apple already generates much higher sales per employee than Visa or Mastercard do and will need, one assumes, to have employees who can push and sell Apple Pay — particularly to banks and retailers, who are the key partners they need to convince.
So who are these suppliers who will get rich as Apple Pay balloons, per Obermueller? Here’s more from the ad:
“I’m going to give you the names and ticker symbols of 6 Apple partners that stand to be big winners as this epic transformation unfolds…
“And I’m also going to introduce you to the one tiny Apple supplier that holds the key to Apple Pay. Without its industry-leading product, Apple Pay would simply not be possible.
“This little-known company has already established relationships with the world’s two leading mobile phone producers—Apple and Samsung, which together control 70% of the U.S. market—and its shares are up almost 280% since the middle of 2012, when our top technology analyst, Andy Obermueller, first recommended it here at StreetAuthority….
“With Apple’s move into mobile payments, Andy predicts that this little stock—along with four other small Apple Suppliers—could be the biggest winners as Apple Pay revolutionizes the credit card industry.
“Andy’s not talking about small gains here. He’s anticipating triple-digit wins from here for the Apple partners that are key to this revolution.”
The ad goes on to take credit for Obermueller’s good history in picking Apple-connected stocks, mentioning one example (Authentec, the fingerprint sensor-maker which they say they picked in 2011 before it was bought out at a 100%+ premium by Apple the following year).
Which leads us to the number one stock they’re suggesting — and, finally, a few details that we can sift to get at some answers for you:
“The #1 Apple Supplier To Buy Now.
“Though you’ve probably never heard of this small company, it controls about 60% of one of the fastest-growing markets our research team has ever seen.
“Its components are used in over 1 billion mobile devices built by some of the world’s leading companies, including Apple, Samsung, and Google.
“And some of the world’s most successful investors are starting to load up on shares of this tiny Apple supplier. For example, legendary billionaire George Soros owns about 400,000 shares, worth nearly $26 million.
“Andy first recommended shares of this fast-growing Apple supplier back in June of 2012, more than two years before Apple announced Apple Pay.
“Anyone who followed his recommendation could have gained 278% since then. But as I’ll show you in a moment, our research suggests this is just the beginning.”
I can feel myself getting wordier and wordier on this one, but let me throw out just a few more clues:
“I’d be willing to bet that 99 out of 100 investors have never heard of this tiny chip maker before. Yet it completely dominates the NFC market.
“Though it only went public in 2010, this firm’s product has already been used in over 1 billion mobile devices from many of the world’s leading companies.
“It has more than 50 years of experience in the semiconductor business. In fact, it literally invented NFC technology alongside Sony nearly two decades ago.”
So yes, this is NXP Semiconductor (NXPI), the “go to” stock for anyone looking for the headline idea when it comes to near field communications (NFC) chips, and the dominant supplier in that little sector. It has been a publicly traded stock only since 2010, but it wasn’t a new company back then — it was originally a division of Philips in the Netherlands, was bought out in an overpriced leveraged buyout by KKR back in 2006, then IPO’d in 2010 as KKR’s partial “exit.”
And yes, as the ad states, “In 2013, long before Apple announced Apple Pay, this firm already controlled 60% of the NFC chip market.” And it was teased as a leader in the eventual “mobile pay revolution” by several tech-enthusiast newsletters, including David Gardner at the Motley Fool who started teasing it in the Spring of 2011, and Andy Obermueller himself, who (rightly) hinted at NXPI as a top stock for 2014 about a year and a half ago.
Soros sold 2/3 of his shares in the September quarter, so that data’s a bit out of date… but you might be more impressed by David Tepper of Appaloosa putting on a huge position in that quarter, 2.5 million shares now worth (if he still holds them) about $200 million. Of course, he might have $200 million in his couch cushions.
NXPI is a well-run company, they were saddled with a lot of debt out of the IPO (it was a leveraged buyout by KKR, remember) that slowed them down for a while, particularly as their better growth markets (auto tech, NFC chips, security) were not completely established before the market took a header in 2008. It’s not just an NFC chip company (they’ve had other less-high-profile products in iPhones before, just not NFC chips), though that is certainly part of their growth strategy as they’ve spent much of the past few years divesting of the chip businesses where they don’t have a strong lead or good margins, and they are, as they call themselves, the “True market leader” in mobile secure payment technology. Not the only provider, but the leader. It’s worth checking out their presentation from their November Analyst Day if you’d like to know more about their progress of the last few years, and their plans for the next stage of growth — looks fairly impressive, and they’re certainly reasonably priced if the expected growth comes through. Do note that they’re reporting in two weeks, so things can change quickly — though analysts have generally been pretty close to the target with NXPI in recent quarters, so perhaps a big surprise either way is unlikely.
The ad said there were a bunch of stocks to suggest, though, so what are the others? First they run through a long list of the partners whose names they happily disclose, all big-name large cap stocks that are either partnered with Apple Pay or expected to benefit from the same trends. I’ll save you the blatheration and just tell you that those six “freebies” from StreetAuthority are Mastercard (MA), Visa (V), Wells Fargo (WFC), Google (GOOG or GOOGL), Starbucks (SBUX) and Arm Holdings (ARMH). Three financial partners, one competitor (Google Wallet) that benefits from the same mobile payment trend, one retailer who accepts Apple Pay, and an Apple chip design supplier. Grab ’em if you like ’em, I own Google and would buy SBUX if it would go down a bit again, dammit, and will let Uncle Warren buy Wells Fargo shares for me (Berkshire owns about 9% of WFC)… everyone should probably own either V or MA (I don’t, unfortunately), and ARMH doesn’t ring my bell at these prices… just in case you want my nickel tour of that group.
Or of course, he talks it up so much that maybe you’ll want to just buy Apple… here’s a bit more of his pitch if you’re curious:
“Apple Pay—like the iTunes Store—is a platform on which Apple can build a massive new revenue stream.
“Within a few years, just as most of us don’t pay for groceries with checkbooks anymore, we won’t think twice about pulling out a smartphone to pay for things, instead of a credit card.
“Not too long after that, we may not even remember how we ever made purchases without them… just like most folks today can hardly remember the world as it was before smartphones, email, and mobile apps demanded our near constant attention.
“… Apple doesn’t try to rebuild an entire industry from scratch. Instead, it makes win-win partnerships with key players in and around the industry. Then Apple merges its products within the key players’ established systems.
“… right now, the very same pattern that Apple established with the iPod and iTunes Store is playing out in the credit card industry with Apple Pay.”
And then, wait, before you go away, he’s got some more little suppliers to pitch…
“In the meantime, you’ve probably never heard of Apple Supplier #2, but it’s the 9th largest semiconductor company in the world. Over the past two years this stock has gained 185%, but that could be just the beginning.
“Apple Supplier #2 Has Gained 185% Since January 2013
“Leading technology focused investment bank, Pacific Crest, estimates that Apple included twice as many of this small firm’s chips in the newest iPhone as it did in the previous one. Maybe that’s why Apple Supplier #2’s revenues jumped 100% over the past year. And it points to a rock solid relationship with Apple that should drive more growth going forward.”
This one’s Avago (AVGO), which had a mammoth year of sales growth, is bigger than NXPI (market cap over $25 billion), and has blown out analyst earnings repeatedly on the back of that sales growth, making it a market darling with a trailing PE of about 100 (that’s partly because they haven’t reported the January quarter yet, that won’t come for a month — if they hit that number, they’re trading at a current calendar year PE of 20-25 or so, and a forward PE (which is using estimates all the way out to October 2016, so be careful) of only 14). I don’t know which chips AVGO supplies and have never looked at them, which apparently has been my loss this year.
“Apple Supplier #3 has been in business with Apple since its leading radio frequency chips were first included in the iPhone in 2008. Over that time, the firm’s market cap has quadrupled from under $1 billion to its near $4 billion valuation now.
“Within six weeks of the iPhone 6 launch, shares of this stock gained 45%
“There’s no question that the iPhone has had an enormous impact on this small firm. And we believe the iPhone’s success will continue, pushing shares of this stock even higher in the coming months.”
That one’s RF Micro (RFMD), which merged with (also an Apple supplier) TriQuint just a few weeks ago to create a new company called Qorvo (QRVO), so presumably Obermueller would be recommending Qorvo as an Apple supplier. Analysts seem excited about the merger so far, but it would be surprising if estimates were very accurate for this newly combined company (those estimates are for about $3.50 in earnings in the fiscal year that ends in March this year, so that’s about 20X almost-current earnings). They report next week for the first time as a combined company, but they won’t have the combined numbers yet so the release will probably be a bit hard to parse — hopefully they’ll give a lot of guidance, earnings are on January 28 if you want to try to get a handle on this one.
“Apple Supplier #4 is a global leader in flash storage chips for mobile phones. The firm’s CEO recently told investors about business with Apple saying: ‘Apple’s decision to increase the embedded storage in their iPhone” will encourage other mobile phone manufacturers “to follow suit by increasing [their] embedded storage capacities.’
“Here’s why this comment is so important. Apple partners almost never mention Apple in any document they release to the public. In fact, this comment is the only one Andy and his research team found in all of their research on Apple partners, and it signals potentially huge profits ahead.
“And this $20 billion tech firm is following Apple’s lead by sharing the wealth with investors. It just instituted a dividend last year, and has already raised it by 25%. That proves the company is committed to rewarding investors through what could be the most profitable era in this company’s history.”
This one’s SanDisk (SNDK), which angered shareholders (and management, it appeared) with a weak revenue quarter in the fourth quarter and some operational problems that might have lost them a large customer (perhaps Apple). The stock has been down on lowered expectations for a couple weeks, but the official word just came Wednesday night from the company so, well, it’s a good thing I didn’t solve this teaser for you early in the week and excitedly tell you to jump up and down and buy SNDK. Lots of uncertainty in this one now, I’d feel a bit more comfortable with Micron (MU) in this space but I don’t own any of the flash/memory companies.
Oh My God there’s another one. I hope you’ve got the stamina for it, I don’t think I have any opinions left:
“Apple Supplier #5 is another leading supplier of radio frequency chips for mobile devices. Its stock is up 105% in the past 11 months—and analysts believe that’s just the beginning.
“Seeking Alpha recently reported that ‘industry insiders envision a day in the near future when a high-end smartphone will include 50 or more [radio frequency] filter’ and went on to say that ‘spending for [these chips] in the latest iPhone [is] up 667%’ from previous iPhones.
“What’s more interesting, though, is that this small firm is reportedly on the cusp of debuting a disruptive technology that could increase the company’s margins by 55% on a critical smartphone component.
“In short, it’s designing a never-before-seen chip that combines the two most used radio frequency chips into one lower cost solution. This could translate into tens of millions of additional unit sales.”
Well, I guess we had to get to this one if we’re talking about hot Apple suppliers — this is Skyworks Solutions (SWKS). Pricey, growing fast, I don’t know anything about their “disruptive technology” … talk amongst yourselves.
Got an opinion on Obermueller and his Game-Changing Stocks, or on NXPI or any of the other suppliers or partners touted by him recently? Shout it out with a comment below — thanks!