Stocks to Watch in Apple Suppliers

By Markets Fool.com

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A global view of Apple's supply chain. Source: Apple.

There are quite literally hundreds of Apple suppliers. The top 200 of these companies help the Mac maker procure over 97% of what it needs, including manufacturing, assembly, and materials. Most of Apple's suppliers are located in Asia, which makes sense given the concentration of companies there that contribute to the consumer electronics supply chain.

Apple's meteoric rise over the past decade has translated into booming business for many of these suppliers. Riding on Apple's coattails has become a legitimate investing strategy in and of itself. But how can an investor sift through hundreds of companies to discover which stocks are worth watching? These three companies are a good start.

1. Qualcomm
Considering the importance of the iPhone to Apple's success, smartphone king Qualcomm is an obvious candidate. Not only does Qualcomm enjoy royalty revenue from every smartphone sold, but it has an extremely successful chip business making components for a wide range of smartphones.

Qualcomm's Snapdragon applications processors have taken over the market for processors, and while Apple uses its own A-chips to power iPhones, Apple has yet to integrate a cellular baseband into its A-chips and still relies on Qualcomm for the necessary modem. Qualcomm has maintained its lead in baseband technology, so Apple has little choice but to buy these parts from Qualcomm right now in order to get the best available modems.

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That's not to say Qualcomm will be safe forever. There is evidencesuggesting Apple is building its own cellular basebands, which is arguably long overdue, as the majority of the market transitioned to integrated solutions long ago. But for now, Qualcomm is enjoying a cushy spot in every iPhone, and over 10% of consolidated revenue comes from the Mac maker.

2. Taiwan Semiconductor Manufacturing
For many years, arch-frenemy Samsung was Apple's exclusive chip manufacturing partner. Even as the South Korean conglomerate competed fiercely in the smartphone market, Apple remained a large customer of its foundry business. The last thing Apple wants is to enrich a major competitor, indirectly helping fund the R&D for competing smartphones, but moving away from a partner that manufactures such a crucial component (Apple's A-chips) isn't easy.

Apple finally brought on Taiwan Semiconductor last year, starting with the A8, which powers the iPhone 6 and 6 Plus. Finally, Taiwan Semiconductor is officially on Apple's list of suppliers. Samsung is still reportedly in the mix, though, producing an estimated 40% of Apple's A8 volumes. It's also possible that Samsung will produce the next A9 chip since it's ramping up its 14-nanometer manufacturing process first, even if the yields aren't that great at first.

Looking longer term, there are numerous strategic reasons Apple will likely continue transitioning as much business as possible to Taiwan Semiconductor, even if there are bumps along the way. The contract chip manufacturer is definitely one to keep an eye on.

3. Universal Display
This is a new one, and a company many industry watchers have anxiously awaited to make the cut. OLED displays offer many benefits over traditional LCD displays, so it always seemed like a matter of time before Apple adopted the technology. Apple Watch is the first Apple product to incorporate an OLED display.

The new wearable uses a flexible AMOLED display made by LG Display . Thanks to that design win, LG Display grabbed a 91% revenue share of the smartwatch display market in the first quarter, according to DisplaySearch. Samsung is expected to supply the OLED displays in the second-generation model. It just so happens that LG Display and Samsung are the two largest customers of Universal Display . LG and Samsung have been the biggest proponents of OLED displays, incorporating the technology into their smartphones for years.

Universal Display supplies both intellectual property and materials needed to make the displays, putting it at the center of the transition to OLEDs. Now that Apple has jumped on the OLED bandwagon, there is a distinct possibility it will continue to use OLED displays in an increasing number of products as the technology continues to advance. If that thesis plays out, Apple will be buying up OLED displays from LG Display and Samsung for many years to come, and Universal Display will likewise be capitalizing behind the scenes.

The article Stocks to Watch in Apple Suppliers originally appeared on Fool.com.

Evan Niu, CFA, owns shares of Apple and Qualcomm. The Motley Fool recommends Apple and Universal Display. The Motley Fool owns shares of Apple, Qualcomm, and Universal Display. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.