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Capitulation in the Apple Foodchain (and AAPL)

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The following is a sample report of Sean's TechStrat Report.
I felt that this note is due just because sometimes, it Okay to say this -- I just think we are seeing one of those "stupid" moments again.

I just noted this link on Apple (AAPL) cutting component orders and this seems to be causing a bit of panic. But I look at what is already in the stocks and what the other factors are. Notably where was the stock already trading and how much business each of these stocks?

I posted a longish note yesterday on Skyworks (SWKS) and Cirrus Logic (CRUS), I felt a trade was setting up and added some SWKS and could increase that name further. As for CRUS, I don't view this one as an investable name, but it's looking very good as a trade again and I now feel very vindicated for taking my last short-term gain off even though I saw more upside.

Now I see this Qualcomm (QCOM) selling this morning and once again the "stupid" word rings true. I had felt that QCOM was just on a ride to $70-80 as the growth drives here had finally become apparent to everyone. And I don't see any notable news to account for this move other than what is the continuing AAPL freak out fear festival. I'll note that AAPL reducing orders might sound bad, but are those orders being picked up by another supplier??

Bottom line, it feels like we are seeing partial capitulation in the AAPL related Semi's, and frankly that makes less sense than the capitulative type move we have been seeing in AAPL. As stated previously, AAPL is now a fiscal cliff proxy and it's poised for a violent move higher on any deal. However, from a longer term perspective I'm thinking the diversified Semi's which are also viewed as AAPL foodchain stocks (BRCM, QCOM, SWKS and AVGO) are not just poised for a 10-20% bounce, but a much bigger sustained move. This first leg could emanate from a the fact that people will realize AAPL is not dead. But the bigger drivers will be continued strong business from all the other customers and the renewed spending in networking, fiber optics and storage -- the other long-term growth areas for Semiconductor solutions for these Comm. Semi's. This will spur the SOX index to firmly break out of the downtrend which has existed since the Spring of 2011.

Now here's why I view the BRCM/QCOM/SWKS as highly investable vs. CRUS being just tradable:

As a closing example for say BRCM as a proxy for the 3 above. The correct assumption is that total smartphone sales grow at effectively the same rate no matter which supplier wins. BRCM's sales into smartphones is the same number. Sales lost at AAPL would be gained by someone else. Or if HTC rebounds and Samsung declines? Same. How about a huge boon for Win8 phones? Same. What if AAPL surprises and grows share again? Same. What if Win8 totally bombs. Same. Thus, for the Semi's it's about total sales volumes and much less how which supplier is winning those volumes. The kicker ultimately will be total mobility content sales plus the other growth areas kicking in.

For CRUS, that math doesn't work as they are a 70% (or greater) AAPL customer. If they were balanced 50/50 between even just AAPL and Samsung, I would have been bullish this whole time on the name. But it's even better to effectively sell into nearly every supplier as BRCM/QCOM/SWKS do. Even so, at these levels I'm still circling CRUS as well and today's news just adds some explanatory information to the technical action in the stock in recent days/weeks.

Twitter: @UdallTechStrat

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