Ever since the iPhone debuted in 2007, investors have looked to Apple supplier stocks as an alternative way to profit from the tech giant's monstrous success.
And right now, circumstances are lining up to make AAPL supplier stocks an unusually strong bet.
Still, it's not as easy as just buying a basket of companies that do business with Apple Inc. (Nasdaq: AAPL). After all, hundreds of companies have a relationship with Apple.
For a stock to make sense as an alternative way to invest in Apple's iPhone business, a company needs to have a large amount of exposure to Apple.
That's why we combed through FactSet data to create a list of AAPL supplier stocks that derive a significant chunk of their revenue from their dealings with Apple and trade on a U.S. exchange.
But before we get to that list, let's look at why now is the perfect time to buy Apple supplier stocks...
Why Apple Supplier Stocks Are Ripe for Buying
The suppliers most dependent on Apple live and die with it.
That can pay off in a big way. When the blockbuster iPhone 6 came out in September 2014, it sent Cirrus Logic Inc. (Nasdaq: CRUS) on a tear, rising 62% over the following nine months.
Meanwhile, bad AAPL news takes a toll on Apple supplier stocks. And that's what we've been getting most recently.
Just this past July, Apple suppliers took a beating in the wake of a disappointing Apple earnings report, with Skyworks Solutions Inc. (Nasdaq: SWKS) sinking 6% and NXP Semiconductor NV (Nasdaq: NXPI) dropping 5%.
This week, a report that Apple had cut back on its orders for the iPhone 7 tanked the entire semiconductor sector. The Philadelphia Semiconductor index slumped nearly 5%.
Expect more of these kinds of reports in the weeks ahead, which will keep downward pressure on most AAPL supplier stocks. While sales of the iPhone 7 are likely keeping pace with last year's iPhone 6s, the lack of growth will keep Wall Street in a sour mood regarding AAPL stock.
This is excellent news for investors, who can buy Apple supplier stocks at an increasing discount.
Cirrus Logic, for instance, is down nearly 13% over the past two weeks.
But AAPL stock will rise again in 2017 and take Apple's suppliers along with it.
We know this will happen thanks to one extraordinary event that's already getting buzz...
Why APPL Supplier Stocks Will Get a Boost in 2017
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In September 2017, Apple will introduce the iPhone 8. That may not seem unusual. After all, Apple introduces a new version of the iPhone every year in September.
But next year's model will be different. You see, it's the 10th anniversary of the iPhone. It's likely that Apple has been holding back several "gee whiz" features for the iPhone 8 to ensure it will be extra special.
Current rumors of new features include an OLED screen that will feature deeper blacks and consume less power; a screen that runs edge to edge with no bezels; long-range wireless charging; and new biometrics such as facial or iris scanning.
The key here is that the iPhone 8 will be a much more substantial upgrade than either the iPhone 6s or the iPhone 7, which will drive record sales.
In October, Cowen analyst Timothy Arcuri said the iPhone 8 represents a "supercycle" for Apple, in which owners of older iPhone models upgrade en masse.
As more details of the iPhone 8 leak out next year and anticipation builds, Apple stock will start to rise, as will the stocks of most Apple suppliers. The hype from the actual release will keep the party going through the release of Apple's Q1 earnings in January 2018. Those earnings will set a record for the most profits earned by any company in history.
Now let's look at the Apple supplier stocks that will get the biggest boost from this historic bonanza...
The 7 Best Apple Supplier Stocks to Buy for 2017
We used a FactSet screen to develop this list of suppliers with at least 20% exposure to Apple, then restricted it to stocks U.S. investors can buy readily.
- Cirrus Logic Inc. (Nasdaq: CRUS) - Exposure to Apple: 66% - Cirrus Logic provides audio chips for the iPhone. With two-thirds of its revenue dependent on Apple, CRUS is particularly sensitive to iPhone news (as noted above). Needham & Co. analyst Rajvindra Gill sees Cirrus revenue declining 33% to 37% in the first quarter of 2017, adding to near-term pressure on the stock price, currently about $51.50. But because of the iPhone 8, Gill has a one-year price target of $65 on CRUS.
- InvenSense Inc. (NYSE: INVN) - Exposure to Apple: 58% - InvenSense makes motion-sensor chips for the iPhone. INVN is down 28% for 2016, to about $7.40. Although InvenSense has been beaten down over the past two years, a successful iPhone 8 and diversification into such areas as drones and the Internet of Things could reverse this chipmaker's fortunes. Still, INVN is a speculative bet.
- Glu Mobile Inc. (Nasdaq: GLUU) - Exposure to Apple: 51.7% - Glu Mobile creates games and other apps for the iPhone. While not technically a supplier, GLUU does derive more than half its revenue from the iPhone. Though its success is more dependent on producing winning apps than on iPhone sales, a blockbuster iPhone definitely helps. In that respect, Glu's ongoing series of Kardashian-related games could help this $2.15 stock break out with an assist from the iPhone 8.
- AEHR Test Systems (Nasdaq: AEHR) - Exposure to Apple: 47% - AEHR tests chips that Apple uses in the iPhone. In October, the company cited Apple as its largest customer. Shares are up 60% in 2016. Research firm Craig Hallum has AEHR on its "Alpha Select" list of promising micro-cap stocks with a price target of $5 - a 67% gain over the current price of $3.00.
- Knowles Corp. (NYSE: KN) - Exposure to Apple: 25% - Knowles makes audio-processing components for the iPhone. The stock is up 17% on the year, which saw the company transition away from less profitable businesses to focus on areas where it feels it has a stronger market position. That positive momentum will get a boost from the iPhone 8. KN shares trade at about $15.65.
- Jabil Circuit Inc. (NYSE: JBL) - Exposure to Apple: 24% - Jabil makes casings for the iPhone. This stock is one that usually reacts strongly to iPhone news. That makes JBL stock one of the better ways to play the iPhone 8. Jabil also has a catalyst in the nascent 3D printing business, having landed a contract with MakerBot earlier this year. Jabil trades at $21.
- Broadcom Ltd. (Nasdaq: AVGO) - Exposure to Apple: 20% - Broadcom makes wireless chips used in the iPhone. Broadcom made gains in the iPhone 7 not just through its merger with rival Avago this year, but from outright wins against other chipmakers. If those wins stick in the iPhone 8, and they should, Broadcom will be a major beneficiary. AVGO stock trades at about $165.
Up Next: Investors looking for more ways to play Apple can check out the latest Apple suppliers list. The Money Morning version includes several reader-friendly elements you won't see in Apple's version. That includes the elimination of duplication as well as ticker symbols for all the companies that trade on U.S. exchanges. This is a great tool for hunting down less obvious plays on the iPhone...
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.