While other computer and smartphone makers have repeatedly
suffered from price wars,
Apple (Nasdaq: AAPL)
always takes a different path. The consumer technology giant
prefers to deliver the most advanced products at premium
Such an approach can create a great user experience, but can
mean real headaches for tech suppliers that want to do business
with Apple. To be selected by the company, you need to make heavy
investments in research and development (R&D) to make sure
your products are up to Apple's very high standards.
A pair of companies are meeting that challenge and are poised
to flourish as Apple embarks on a new cycle of hardware releases.
Shares of Apple have surged 20% this quarter in anticipation of
that product refresh, and these companies look set to ride
When I last looked at Apple's preferred supplier of audio chips,
Cirrus Logic (Nasdaq: CRUS)
, back in April, its shares had just suffered a 43% plunge over
the prior six months. That's the downside of a heavy dependency
on Apple. Famine often follows feast when it comes to cyclical
At the time, I thought shares began to look like a bargain,
with a single-digit forward multiple. But that call was
premature, and shares slipped a bit further. Belatedly, they are
now moving higher.
Much of the renewed optimism for Cirrus and other suppliers is
due to imminent launches of new iPhones and a wearable watchlike
device. Hopes are rising that the new iPhones will sell well in
the all-important Chinese market, if Apple can deepen its
relationship with China Mobile, that country's largest wireless
service provider (with more than 700 million subscribers).
Because Apple is so tight-lipped about its supplier base and
production plans, there has been some controversy surrounding
Cirrus Logic's role in Apple's future plans. Might Apple switch
vendors? It's always possible, but recent industry commentary
suggests the relationship remains firmly intact.
Still, 10.3 million shares of Cirrus are held by short
sellers, which is the highest level since the end of May and
represents 16% of the float and six days' trading volume. If the
shorts are wrong, then a massive short squeeze might ensue.
However, analysts' estimates for the current fiscal year
(which ends in March) have been rising, not falling, indicating
that few on Wall Street doubt that Apple's relationship with
Cirrus remains on solid ground.
The Soft Touch
While Cirrus has played a leading role in Apple's audio efforts,
Cypress Semiconductor (
has been a leading supplier of chips that facilitate the
touchscreens in iPads and other devices. To be sure, Apple works
with other vendors, such as
Synaptics (Nasdaq: SYNA)
Atmel (Nasdaq: ATML)
, but Cypress is especially well-positioned to deliver a greater
amount of content to Apple.
"Cypress can leverage its manufacturing assets and processes
to help optimize cost for performance and best serve the highest
volume opportunities," said analysts at Lazard, whose $16 price
target is more than 40% above current levels. Lazard's analysts
speculate that Cypress may play a key role in Apple's upcoming
Shares of Cypress have been in the doghouse for an extended
period, dropping 25% over the past two years while the Nasdaq
composite index rose more than 40%. Much of the blame goes to a
bungled launch of its previous touchscreen technology, known as
In recent meetings with analysts, Cypress management noted
that the current Gen 5 hardware and software are performing more
smoothly. The company anticipates robust demand in the coming
year as Gen 5 systems start to ship to customers.
At first blush, Cypress looks to be a great dividend growth
story. The company's dividend was given a 63% boost in 2012 to
$0.44 a share, good for a nearly 4% yield. But management appears
committed to keeping the divided at current levels for the near
future, even as analysts see earnings per share rising from $0.54
this year to $0.85 next year.
Risks to Consider:
A disappointing launch of Apple's new products, or a broader
slowdown in consumer electronics spending would keep these stocks
Action To Take-->
Both of these companies generate considerable cash flow, sport
strong balance sheets and generate solid margins. Short-term
investors focus on quarter-to-quarter trends, but both Cirrus and
Cypress are setting the stage for continued industry leadership
through their heavy R&D spending.
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