Apple Inc. (NASDAQ:AAPL) has the power to determine the future of its suppliers; at least a few, if not many, as far as its demand for materials and components is concerned. The company has the potential to dictate how much credit its supplier needs to get, and consequently, a significant shift in earnings. In fact, analysts take a serious consideration of Apple’s business model and strategy, whenever they are working on price targets and other estimates for a given major vendor to the tech giant.
According to a research report done by Barclays PLC (LON:BARC) (NYSE:BCS) Equity Research unit, some of Apple’s suppliers peg their estimates against Apple’s demand for their materials going as far as 2015. Is this a dangerous situation? Does it mean that if anything on the downside was to happen to Apple Inc. (NASDAQ:AAPL), these suppliers would suffer significantly? Well, in as much as this is good for the principle of prudence, diversification is of the essence, but nonetheless, kudos to Apple Inc. (NASDAQ:AAPL), as it just shows how much of a father figure it is to some of its suppliers.
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According to the report by Barclays PLC (LON:BARC) (NYSE:BCS) Equity Research, Taiwan Semiconductor Manufacturing Company Ltd (TSMC), relies heavily on Apple Inc. (NASDAQ:AAPL) demand for its products. This is ideally a case example of Apple Inc (NASDAQ:AAPL) playing a father figure to one of its suppliers.
The report indicates that the demand by for semiconductor equipment by Apple for use in its PC CPUs and iDevices impacts heavily on the performance and needs of TSMC. Additionally, the impact comes in both positive and negative dimensions for the Taiwan based company, leaving it with no chance but to map its strategies on Apple Inc. (NASDAQ:AAPL)’s demand. Below, are highlights of the pros and cons (“The Good Father, and The Bad Father”), associated with factoring Apple’s demand in TSMC’s strategy.
The Good Father
- Barclays equity analysts estimate that TSMC will manufacture A7-like ARM CPUs for Apple Inc. (NASDAQ:AAPL), starting in 1Q14E for tablets or ARM-based notebooks, by ramping up 60-80k per month 20nm HKMG/16nm FinFET 12-inch wafer capacity by 4Q15E.
- By factoring in the ramping up of the Apple Inc. (NASDAQ:AAPL) orders, the analysts raise the sales estimates for 2014 to growth of 14% y/y from 7% y/y, and increase the EPS estimate by 5% for 2014, to NT$6.09 (from 2% y/y growth to 7% y/y).
- TSMC might see less direct competition from Samsung (OW, covered by SC Bae), as Samsung can leverage less on Apple Inc. (NASDAQ:AAPL) new orders to drive its process upgrade to 22/16/10nm.
The Bad Father
- The analysts estimate that TSMC will need to invest $3.5-5bn per year, in order to meet the demand for Apple, boosting capex to US$12.5-14bn for 2014/15E from US$8-10bn for 2013E. This should result in TSMC’s sales, as a percentage of debt financing, rising to 15% for 2014E and 10% for 2015E, due to its shortage of cash.
- The analysts also estimate a $4,000-4,500 per wafer price for a 35-40% gross margin for the Apple orders, and they believe it is inevitable that TSMC’s gross margin will contract to 40% (+/-2%) for 2014/15E, compared with the corporate average of 45-50% for the past five years.
- In-sourcing might drive more order cuts by Samsung toward TSMC’s higher-margin ARM APs, baseband ICs, and Bluetooth/WiFi IC customers.
While it is impossible to directly correlate the benefits cited above vs their consequential adversities, Apple Inc. (NASDAQ:AAPL) is indeed pushing TSMC way more than the Korean based semiconductor company may be able to stand; but can it take the heat, given the benefits? Growing your capex by more than $2 billion based on the demands of one customer is no mean fit.
Apple Inc. (NASDAQ:AAPL) is simply shifting some level of risk to its supplier, albeit unintentionally. This could, as mentioned scale further upwards, if Samsung goes on to slash its capex by 50%, as earlier featured in one of our articles. Then, according to the Barclays research report, the analysts still maintain their rating on TSMC, as well as their view on the semiconductor industry, despite increasing their price target from TWD84 to TWD88 (or $2.85 to $2.99) per share.
At the time of this writing Taiwan Semiconductor Manufacturing Co. Ltd (5425.TWO) was trading at TWD13.80 per share, down TWD0.15, or 1.08% decline, from yesterday’s close.