Apple Inc. (NASDAQ:AAPL) is generally considered a buy-and-hold stock for many investors, but for some, it remains very much a trading stock, particularly at different stages of each year’s iPhone cycle. For investors wanting exposure to Apple without actually buying Apple stock, iPhone supply chain stocks can look attractive. However, it helps to have some insight into what the company might be planning and an eye historical trends around each year’s iPhone cycle.
Earlier this month, KGI Securities analyst Ming-Chi Kuo and some unnamed supply chain sources reported that all three of this year’s new iPhone models will feature the Face ID facial recognition system. If that’s true, then they will all need the high-end camera that’s in the iPhone X because of the important role it plays in the 3D facial recognition.
Ironically, one of Apple’s big suppliers that’s under constant watch is its top competitor, Samsung. The Korean electronics firm was reported to have slashed production of its OLED panels because iPhone X demand was weaker than expected. Apple fans and investors alike tend to watch the iPhone supply chain for leaks pointing to the company’s plans for the future and hints about whether that future will be a strong one, both for Apple and its iPhone supply chain.
Bernstein analysts David Dai and Toni Sacconaghi, Jr. said in a note this week that iPhone supply chain stocks have tended to outperform the S&P by about 13% before a launch and then underperform by about 7% after a launch. In fact, this has happened 5.5 times over the last seven years. They noted that iPhone supply chain stocks have closely followed the “buy the rumor, sell the news” pattern, just as Apple stock often does.
The Bernstein team also said that iPhone supply chain stocks have over-corrected over the last three months following the repeated reports about the weakness of the iPhone X cycle. They believe investors were disappointed when they didn’t get the “super cycle” they had been expecting. They also feel that this over-correction presents an opportunity for investors, but they warn investors to be selective about which supply chain stocks they buy.
More and more analysts are admitting that the iPhone’s “super cycle” days are over, and that means a general slowdown in growth and/or unit sales. Dai and Sacconaghi expect “less return” from Apple stock and the iPhone supply chain stocks as unit growth decelerates. They split the basket of suppliers they looked at in half and explained that the top half of their list can still “generate significant alpha every year.” Additionally, they found a roughly 55% average dispersion between the returns from the companies on the top and bottom of the list, which indicates that all the supply chain stocks aren’t equal.
Interestingly, Apple stock has underperformed the top-performing iPhone supply chain stocks over the last seven years, ranking in 11th place after its top 10 suppliers. The Bernstein team explained that the top suppliers are those with increasing content in each year’s new iPhones. Of the bunch, they like 3D sensing component makers AMS and Lumentum and acoustic component suppliers Goertek and AAC the best.
