3 Apple Supplier Stocks to Watch

MarketsMotley Fool

Each year, Apple (NASDAQ: AAPL) introduces new iPhones. Those new iPhones generally include significant upgrades to existing functionality as well all-new functionality.

Apple doesn't operate in a vacuum -- it works closely with third-party suppliers for components and technologies critical to delivering that new functionality, as well as the upgrades to existing functionality.

Continue Reading Below

With that in mind, here are three Apple suppliers I think investors should keep an eye on, as they could be set to reap financial benefits from the iPhones that Apple introduces in 2018: Broadcom (NASDAQ: AVGO), Finisar (NASDAQ: FNSR), and Intel (NASDAQ: INTC).

1. Broadcom

Broadcom was a big winner from the iPhones that Apple introduced in the fall of 2017. The company saw a substantial increase -- it's believed to be somewhere in the neighborhood of 40% -- in the dollar content it provided into those new phones compared with what it sold into the previous generation iPhones, which helped it to enjoy 33% year-over-year growth in its wireless chip business in its most recent quarter.

Although Broadcom probably isn't going to see the kind of generation-over-generation dollar content increase in the iPhones that launch in 2018, the company is still well positioned to profit from the iPhone next year, in two ways.

First, the new models Apple introduces next year should include some key enhancements in wireless capability. Such enhancements are generally good for Broadcom as more complex -- and more expensive -- chips are required to support those enhancements.

Broadcom could also benefit from continued iPhone unit growth next year. This year, Apple introduced one all-new iPhone, the iPhone X, as well as two upgraded versions of the prior generation models.

Next year, if the rumor mill is accurate, Apple is planning not only to update this year's iPhone X, but also to bring the same goodness of the iPhone X to both a more accessible price point with a cost-optimized model as well as to a larger screen form factor. That widening of the range of iPhone offerings could help Apple sell more iPhones, which, in turn, helps Broadcom sell more wireless chips.

2. Finisar

One of the key features introduced in this year's iPhone X was what Apple calls a TrueDepth camera. This is essentially a new front-facing camera system that can perform depth sensing. That hardware, coupled with Apple's proprietary software, allows that camera to do things such as accurate and secure facial recognition as well as face tracking.

A key component of Apple's TrueDepth camera is a component called a vertical cavity surface emitting laser, or VCSEL. Finisar was originally expected to be one of two VCSEL suppliers to Apple for the iPhone X, but the company saw a delay in the qualification of its components for the iPhone X -- something that probably held up initial production of the iPhone X and, as my fellow Foolish colleague Evan Niu thinks, led to a delay of iPhone X availability into November.

The good news for both Apple and Finisar is that Finisar CEO Jerry Rawls recently said on the company's most recent earnings call that the company began "shipping production quantities for our VCSEL arrays for 3D sensing" during its most recent quarter. He also said the company just acquired "an approximately 700,000-square-foot facility in Sherman, Texas, for $20 million." That site, the executive explained, "will be used to expand [Finisar's] manufacturing capacity for VCSELs using 6-inch wafers" and should go into mass production in the second half of next year.

It seems Finisar is gearing up for a big surge in VCSEL demand, and I wouldn't be surprised if it were Apple driving much of that expected demand increase.

3. Intel

Chip giant Intel entered Apple's iPhone supply chain with the introduction of the iPhone 7-series smartphones in the second half of 2016. Intel was brought on as a second source for cellular modem chips, marking what was arguably the first major win for Intel's cellular modem business since it bought its way into the market back in 2011.

Intel went on to win business again in this year's iPhone 8-series and iPhone X smartphones, which will probably serve to boost Intel's cellular modem business again year over year -- Intel should have revenue from this year's iPhone lineup, as well as from older-generation iPhones.

For the coming product cycle, though, analyst Ming-Chi Kuo with KGI Securities says Intel is on track to grab between 70% and 80% of Apple's cellular modem needs. In this case, Intel would go from being a second source supplier to the primary source.

If that shift pans out, Intel stands to enjoy another significant bump to its cellular modem business thanks to a combination of higher unit shipments and, possibly, higher average selling prices, as the company's 2018 cellular modem looks a lot more competitive than its previous efforts -- something that could allow Intel to charge more for each modem and accelerate revenue growth.

10 stocks we like better than Broadcom LtdWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Broadcom Ltd wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of December 4, 2017

Ashraf Eassa owns shares of Intel. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd and Intel. The Motley Fool has a disclosure policy.