Will Apple Pressure Its Supplier Stocks With iPhone 13?

Apple launched its much anticipated iPhone 13 lineup last week, with the new devices featuring upgrades to cameras, displays, and battery capacity. So what does the launch mean for Apple Component Supplier Stocks?

Apple has kept pricing unchanged versus last year’s devices, despite offering more advanced features and higher storage on entry-level modes. This is noteworthy as the consumer electronics industry has been contending with a significant supply crunch for semiconductors and supply chain headwinds, which should translate into higher costs. Considering that Apple has rarely taken a hit on margins (gross margins soared about 400 bps year-over-year to 42% in Q3’FY’21), we think that Apple’s suppliers might face some margins pressure with the current iPhone cycle. That being said, Apple is looking at bigger volumes over the iPhone 13 cycle, and this could compensate suppliers to an extent. Bloomberg has indicated that Apple is likely to produce about 20% more of the new devices initially than it did for the iPhone 12. Moreover, carriers are also offering much more attractive promos on iPhones this year and that could also benefit Apple revenues and demand for its suppliers.

Our theme of Apple Component Supplier Stocks has declined by about 4% over the last week. While this is partly due to the broader market sell-off due to the real estate crisis in China, it’s possible that the iPhone launch event and the lack of price increases also hurt supplier stocks. The theme has also underperformed in 2021, rising by about 10% year-to-date, versus the S&P 500 which was up by about 17% over the same period. However, the theme has outperformed since early 2020, rising by about 39%, versus about 36% for the S&P 500. Within our theme, Jabil Circuit a company known for making casings for iDevices has been the strongest performer, with its stock up by 42% year-to-date. On the other side, Qualcomm, a company known for its modems and application processors, has been the weakest performer, with its stock down by about 13% year-to-date.

Our indicative theme on Apple Component Supplier Stocks – which includes a diverse set of companies that supply components for iPhones and other iDevices - is up by about 13% year-to-date, roughly in line with the returns for Apple stock, although the theme has underperformed the broader S&P 500, which is up by roughly 20% over the same period. However, the near-term outlook for the theme is looking better.

September promises to be an eventful month for Apple, with the company reportedly planning multiple product launches that are likely to include the iPhone 13, refreshed Apple Watches and AirPods, and possibly updated versions of the MacBook Pro and iPad Mini. This should also bode well for Apple suppliers, as newer products often have more sophisticated, higher-value components. Apple is likely to ensure a stronger supply of this year’s flagship devices. For example, Bloomberg reported that suppliers are preparing to build as many as 90 million new iPhones this year, a 20% bump over its initial production run for the iPhone 12. Demand for Apple’s devices is also likely to remain strong, as the remote working trend is likely to continue for several more quarters, as U.S. companies have been delaying their return to office plans following the spread of the highly infectious Delta variant of the coronavirus. However, there are some near-term risks for suppliers. The recent surge in Covid-19 cases in Asia could result in some supply chain disruptions and the ongoing semiconductor shortages could also cause some headwinds for component makers.