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Stocks  | January 31, 2019

Apple’s shareholders are still suffering, and its suppliers aren’t faring much better.

The iPhone maker’s latest earnings lifted the stock about 5.5% on Wednesday, but it is still 30% below its 52-week high. An index of 50-plus Apple suppliers Barron’s tracks is down 33% from its peak for the last 12 months. That means more than $300 billion in market value has been wiped out since weakness in iPhone demand surfaced.

Even though the suppliers’ stocks are down, analysts aren’t warming to the group. Revenue from the iPhone will fall again in Apple’s current quarter: The company continues to lament high inventories and weak emerging-market demand. Still, with suppliers’ valuations depressed, there is at least one stock to revisit.

The back story: Apple (ticker: AAPL) warned on Jan. 2 that it would miss its fourth-quarter guidance, sending its shares down 10%.

Apple investors shouldn’t have been surprised. The company’s suppliers were saying iPhone sales were weak a month before Apple management said the same. Qorvo (QRVO), for example, warned its sales would fall short of Wall Street’s expectations on Nov. 13. Skyworks Solutions ’ (SWKS) offered a disappointing outlook when it reported numbers on Nov. 8.

The plot twist: Tuesday night, Apple management indicated that iPhone revenue will be lower in the current quarter than in the prior one. That seasonal pattern is normal, but the magnitude of the decline surprised analysts.

Apple expects to sell $57 billion worth of goods, $900 million less than Wall Street expected. Demand in emerging markets such as India and China is weak, and as Apple also pointed out, customers are holding on to old iPhones longer. Whether that’s because of increasing quality or macroeconomic weakness is up for debate.

What’s Next: If sales of smartphones slow as the market matures, companies in the supply chain will have to wait longer for component orders to recover.

KeyBanc analyst John Vinh sees Apple suppliers continuing to struggle. “Despite opportunities for content gains, we think it will be extremely challenging for Apple supplier stocks to work in the current cycle,” he wrote in a note to investors, referring to the possibility that individual suppliers could produce a bigger share of the parts in an iPhone.

Vinh likes shares of Broadcom (AVGO), in part because it is diversifying away from the mobile-phone market. Today, it derives 25% to 34% of its sales from Apple. That’s high, but lower than other suppliers like Cirrus (CRUS), Skyworks and Qorvo, according to Bloomberg figures.

Those three generate 82%, 47% and 36% of their sales from Apple, respectively. Dependence on one customer increases risk and makes that group of stocks more volatile than more-diversified suppliers.

Broadcom shares are up 11% year over year, but trade for less than 12 times estimated 2019 earnings. That valuation multiple is a 18% discount to the stock’s historical average.

Broadcom stock has also held up better than shares of other Apple suppliers. Management has been aggressively buying companies and completed a deal to purchase software maker CA for $18 billion in November.

Apple is going to have to fix its problems in emerging markets before the stocks of its suppliers can recover. The macroeconomic environment could improve, but some see more structural issues with iPhone sales.

“To win in India it requires a full-time commitment and investment,” said Sidarth Kapoor, a portfolio manager at Avasar who is Indian. “They can’t sell outdated iPhones at discounted prices to win over Indians who can choose from a plethora of suppliers.”

Stock in both Apple and its suppliers could gain if Apple gets its emerging-market strategy right.

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