Shares of Apple (NASDAQ: AAPL) supplier Broadcom (NASDAQ: AVGO) have been in fine form this year, thanks to speculation that the next iPhone could bring huge gains for the chipmaker. But fellow Apple component supplier Analog Devices (NASDAQ: ADI) has seen a much smaller rise because of rumors that it could lose Apple business. However, Analog Devices' latest results and guidance from late May indicate that its Apple account might be intact, setting up the company for solid growth in the second half of the year once iPhone production begins.
Which company looks like the better Apple play?
The case for Analog Devices
Apple reportedly supplies 12% of Analog Devices' revenue, using the latter's chip to enable 3D Touch in its iPhones. It is unlikely that Apple will skip this feature in its next device, so Analog should retain its spot in the next iPhone.
In late May, Analog's revenue guidance range of $1.37 billion to $1.45 billion for the current quarter turned out to be higher than Wall Street's $1.36 billion estimate, lending credence to the belief that the chipmaker has kept its Apple spot. The retention of its Apple business will be a big deal for Analog Devices as Cupertino is forecast to make 156 million iPhone units in the second half of 2017.
But Apple isn't the only reason investors should take a look at Analog Devices, as the company is witnessing rapid growth in its industrial and automotive businesses. The industrial business supplies 46% of the chipmaker's total revenue in the most recent quarter, and it grew 20% year-over-year in the second quarter. The automotive market accounted for15% of sales in the most recent quarter and it was up 9% over the prior year.
More importantly, Analog expects the industrial business to outgrow seasonal trends in the current quarter, thanks to the growing demand for its factory automation solutions. Meanwhile, the automotive business is also gaining traction because of the chipmaker's focus on the advanced driver-assistance systems (ADAS) market.
Analog's new radar technology product can reduce the time taken by automotive component manufacturers to develop ADAS systems for cars at a lower cost, according to the company, setting it up to tap into the multibillion-dollar opportunity in the automotive chip market.
The case for Broadcom
Broadcom reportedly relies on Apple for 20% of its revenue, so it could see more of a boost from increased iPhone production this year as compared to Analog Devices. What's more, Broadcom's gains won't be limited to an increase in the number of iPhones built as the chipmaker expects a 40% jump in content in the next iPhone.
Therefore, Broadcom's wireless business looks set for a major boost in the second half of the year after recording 45% year-over-year growth in the second quarter. But there is another catalyst in the form of the enterprise storage business that Broadcom investors shouldn't miss.
This business is on a tear as Broadcom's storage system-on-a-chip (SoC) solutions are capable of enhancing the storage capacity and density of hard-disk drives (HDDs). This puts the chipmaker right in the middle of the high-capacity storage boom as storage companies are increasingly churning out higher-capacity drives to meet cloud storage demand by data centers.
In fact, HDD storage capacity jumped 30% in 2016 though overall shipments were down 9.5%, and the trend is expected to continue as the likes of Seagate move to 20 TB HDD configurations by the end of the decade as compared to the near-term plan of making 14 TB and 16 TB HDDs.
Broadcom could witness explosive growth in both the wireless and the storage markets, which together account for 45% of its total revenue.
Both Analog Devices and Broadcom have their own set of catalysts, though the latter could deliver stronger upside thanks to its deeper relationship with Apple and the fast-growing nature of the storage market. However, Broadcom looks like a volatile bet as it has thinner margins than Analog Devices, and is more susceptible to any negative arising from Apple's supply chain.
Meanwhile, Analog Devices' lower reliance on Apple could be a blessing in disguise in case things go south with Cupertino. The chipmaker's fast-growing industrial and automotive businesses seem capable of powering its growth even if it loses its iPhone account.
Investors with a higher risk appetite might favor Broadcom, while Analog Devices would better suit more conservative investors.
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