Information Technology – Update
Apple reported strong quarterly results on Monday evening (27.04.15); with the announced figures largely beating consensus estimates. While we don’t plan to extensively glorify Apple’s success here, we do fully recognize that it has successfully created its own ecosystem and that consumers are highly addicted to its products and therefore very loyal. These two factors mostly explain Apple’s success.
Its resilient growth is now becoming more visible and the company’s outlook remains bright as new product launches and product upgrades support growth prospects and price momentum. For instance, around 20% of its global iPhone customers have so far upgraded to a new version of iPhone 6 and the iPhone 6 Plus. The company is heavily geared towards its iPhone product line, i.e. the iPhone business generates about 85% of the company’s profits. So it is not surprising that there has been little communication regarding the Apple Watch of late.
Apple’s results are surprisingly strong, especially given the considerable currency headwinds during the 1st quarter of the year. This suggests that a lot more can be expected in the future, once the currency headwinds have vanished. We therefore remain positive on Apple for the following reasons:
- Apple manages its own ecosystem and the underlying replacement market (forced upgrades that take advantage of the latest technology offered in its byproducts such as Apple Watch) in an extremely efficient manner,
- Key product offerings are placed in the upper price range; this gives the company gross margins above the industry average,
- New products pipeline: Apple Watch (June) and a new iPhone and larger screens for the iPad are scheduled for late 2015, and
- Investors should benefit from higher allocations for the share buyback program and dividend payments.
Taking a broader view of Apple’s success, one could consider investing in its supply chain, which is just as interesting if not more interesting than Apple itself. Particular stocks of interest are:
| Company | Ticker | Sector | Upside Potential | Sharpe (FY01) |
| ARM Holdings PLC | ARM.L | Semiconductor and Related Device Manufacturing | 15 % | 4.0 |
| Investment case: Based in the UK, ARM Holdings designs chips used mainly by mobile applications (smartphones and tablet PCs). The company has a market share of around 90% in the CPU-design market. It collects royalties from its customers, such as Apple, who use its chip design. ARM has performed well during the last 6 months. Strong sales at Apple and the oncoming launch of the next generation of processors for mobile applications (64-bit) should boost further royalty growth for the company. | ||||
| Company | Ticker | Sector | Upside Potential | Sharpe (FY01) |
| LARGAN Precision Co Ltd | 3008 | Optical Instrument and Lens Manufacturing | 5 % | 2.55 |
| Investment case: Based in Taiwan, Largan is a leading camera lens producer; Apple is its key customer. Largan is the industry leader and is well-equipped to handle the rising complexity in smartphone camera lens production. Long-term growth drivers for Largan include achieving higher apertures, better uniformity, more depth of field, optical image stabilization, dual cameras, and zoom lens. The company is also set to benefit from the potential pixel migration (higher resolution) and the increasing usage of dual cameras in mobile applications. | ||||
| Company | Ticker | Sector | Upside Potential | Sharpe (FY01) |
| Taiwan Semiconductor Manufacturing Co Ltd | TSM | Semiconductor and Related Device Manufacturing | 10 % | 4.03 |
| Investment case: Taiwan Semiconductor (TSMC) is the largest company in Taiwan by market cap. The company is also a global leader in semiconductor contract manufacturing. TSMC is one of the historic manufacturers for Apple’s internally developed applications processors. While this contract may be at risk, we believe that Apple benefits from superior execution and a lack of any conflict of interest. For Apple to switch to a different producer, may add more risks (reputation and performance) than immediate monetary benefits. TSMC shares are quoted on the New York Stock Exchange. | ||||
| Company | Ticker | Sector | Upside Potential | Sharpe (FY01) |
| TPK Holding Co Ltd | 3673 | Miscellaneous Electrical Equipment and Component Manufacturing | 8 % | 2.24 |
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Investment case: Based in Taiwan, TPK is a global leader in touch technology. About half of the company’s profits are generated through Apple product requests. There are a number of growth drivers which TPK should be able to exploit in a constructive manner such as touch technology for wearable and smartwatch applications. The sub-sector suffered from excess capacities in 2013 and 2014 which are now in the process of being absorbed by higher demand. For this reason we believe that TPK is a typical turnaround story. |
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