3 Stocks on Apple’s ‘Hit List’ to Buy Next

While most investors are focused on the introduction of the iPhone8 and iPhone X from Apple (Nasdaq: AAPL), I am much more interested in other news the company is making. It is involved in the consortium that submitted the winning (for now) $14 billion bid for 60% of the semiconductor manufacturing business of struggling Japanese conglomerate Toshiba (OTC: TOSYY).

This move further highlights to me a major change underway at Apple. The company famously outsources almost its entire supply chain. But that seems set to change, especially with regard to semiconductors.

The reason is straightforward. . .as I discovered in my Singularity project research, semiconductors are the lifeblood of our technological world, including the iPhone.

Apple and Semiconductors

Apple and its rival, Korea’s Samsung Electronics (OTC: SSNLF), remain the top two semiconductor buyers. Together, the two consumed $61.7 billion of semiconductors in 2016. Last year was the sixth consecutive year that the two companies led the way in usage of semiconductors.

But there is a difference between the two.

You see, Samsung is also a major manufacturer of semiconductors. So it consumes its own chips.

But Apple buys memory chips (and OLED screens) from Samsung for its iPhones. The Wall Street Journal reported that Samsung stands to make about $4 billion more in revenue from Apple’s iPhone X components than from components made for its own Galaxy S8 in the 20 months following the iPhone release.

I’m sure that doesn’t make Apple happy. But Samsung is one of the few firms globally that can make enough small chips packed with extra memory capacity (or enough OLED screens).

That is simply due to the exorbitant cost of building a new plant to make semiconductors, which are called foundries or fabs. Even back in 2010, a new foundry set Taiwan Semiconductor (NYSE: TSM) back $9.7 billion. Today, that cost is likely doubled.

That brings us back to Apple’s interest in Toshiba’s chip business. It is heavily involved in the manufacture of NAND memory chips similar to the ones that Apple is currently buying from rival Samsung.

Apple’s Growing Chip Expertise

There is a lot more, however, to the story surrounding Apple and semiconductors.

The company has long been known in technology circles as having prowess in chip design. After all, it did build core processors for both the iPhone and iPad (manufactured by TSM). And it has created fingerprint chips as well as a unique chip for AirPods that allows seamless pairing with other Apple hardware.

Now, Apple is believed to be expanding efforts in developing proprietary semiconductors in artificial intelligence (AI chips). In mid-September, Apple revealed an AI chip that would power facial recognition for iPhone X.

And its plans don’t stop there. Apple may also be interested in building designs for core processors for notebooks, modem chips for iPhones, and a chip that will integrate touch, fingerprint and display driver functions.

This should not come as a surprise to anyone. It has made six semiconductor-related acquisitions since 2008 and is also vacuuming up AI chip-related start-ups. And it poached a top modem chip engineer from Qualcomm (Nasdaq: QCOM) earlier this year as well as engineers from Taiwan’s leading display-driver designer Novatek Microelectronics. And it also took talent from Broadcom (Nasdaq: AVGO) and Texas Instruments (Nasdaq: TXN)among others.

Related: Buy These 3 Hot Semiconductor Stocks for Long-Term Profits

According to research firm IC Insights, Apple ranked as the world’s fourth biggest chip design firm as of the end of 2016. It trailed only Qualcomm, Broadcom and Taiwan’s Mediatek (OTC: MDTKF) and was one spot ahead of semiconductor stock market darling Nvidia (Nasdaq: NVDA).

Investment Implications

The emphatic move by Apple into semiconductors is not good news for many of its suppliers. One example is Germany’s Dialog Semiconductor (OTC: DLGNF), which had Apple poach many of its engineers and will design its own power management chip that Dialog was supplying to it.

Or the U.K.’s Imagination Technologies (OTC: IGNMF), after Apple said it would no longer use its intellectual property surrounding graphics processors. Imagination had to sell itself to a Chinese company in order to survive. Apple also took its chief operation officer before it announced it was building its own graphics processor.

The damage will not be restricted to less well-known overseas Apple suppliers. The damage will eventually spread to those suppliers that trade here in the U.S. too.

I believe at the top of Apple’s ‘hit list’ are Qualcomm and Intel (Nasdaq: INTC). Both provide baseband modem chips responsible for mobile communications to Apple. The ongoing legal battle between Apple and Qualcomm over the latter’s licensing fee model for the modem chip tells you all you need to know there. Qualcomm got 40% of its revenue last year from Apple and Samsung.

Intel, in addition, may be on the way out not only with regard to modem chips but also with chips for the iPad. Notebooks are becoming thinner and consumers are demanding longer battery lives. This tilts the playing field away from Intel chips and toward the architecture from ARM Holdings, which is now owned by Japan’s Softbank (OTC: SFTBY).

Other companies possibly in Apple’s firing line in the future are Analog Devices (Nasdaq: ADI) and Synaptics (Nasdaq: SYNA), which are Apple’s key suppliers for touch sensors and display-driver integrated circuits currently.

And don’t forget about Apple’s radio frequency chip supplier, Skyworks Solutions (Nasdaq: SWKS), or its audio and voice chip provider, Cirrus Logic (Nasdaq: CRUS). They may also be at risk.

Are there any possible winners here from Apple’s aggressive push into semiconductors?

Yes, I believe the foundry service providers that actually make the chips for Apple are safe for now since it has no plans at present to actually move into manufacturing.

That points to the company that currently dominates Apple’s chip production – the world’s largest contract semiconductor manufacturer, with 56% of the market – Taiwan Semiconductor. Apple became the company’s biggest client in 2015 and it accounted for 17% of its revenues at just under $30 billion for 2016. This year, Apple should make up about 20% of TSM’s revenues. And Apple has already engaged TSM to begin work on its core processor iPhone chips for 2018.

Taiwan Semiconductor’s stock is up 33% year-to-date and 25% over the past year, and it has a dividend yield of 3%.

There is no doubt about Apple’s new and almost ruthless aggressiveness regarding its supply chain. One of the very few beneficiaries will be Taiwan Semiconductor.

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Tesla Is Going to Embarrass Warren Buffett

“I’ll meet you at Pilot” my future wife said to me before hanging up the phone.

She was explaining to me how to get to her parents’ house. (This was before our phones were a GPS device.)

But by meeting me at the Pilot gas station, I knew exactly where that was.

In the town she grew up in, it was a local landmark. Right off the highway, Pilot always had the cheapest gas and was a spot everyone knew of.

That was over 10 years ago, though.

Now it’s just another gas station along the Interstate 40/Interstate 85 corridor in the middle of North Carolina.

However, even though it is just one of many gas stations with competitive gas prices across the country, legendary investor Warren Buffett felt the value was now ripe for an investment.

Last Tuesday, he announced his company, Berkshire Hathaway, would buy a 38.6% stake in Pilot Flying J, which operates the little truck stop I was meeting my future wife at.

To me, he is clearly going against one of his investing rules — never buy a stock you are not comfortable owning for 10 years.

And if you typically follow Buffett’s investments, this is one you should pass on. Here’s why.

The Oracle of Omaha

I have a lot of respect for the Oracle of Omaha. Who wouldn’t? He is the world’s third-richest person, and his success story is one of the greatest.

Many investors idolize him and simply buy whatever he buys.

However, I think he is making a mistake on his latest acquisition, Pilot Flying J.

It actually goes against one of his main rules, if you ask me.

I have used his No. 1 rule before, which is to never lose money, but he has a few other rules to invest by. One of them is to never buy something you don’t want to own for 10 years.

That’s his investment time frame in a nutshell. “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

But Buffett’s latest acquisition is one I am uncertain about in just five years, and I question its existence 10 years from now.

Still, that hasn’t stopped investors from chasing his trade.

TravelCenters of America LLC (Nasdaq: TA) jumped 10% on the news, without even knowing the financial details of the transaction. That’s partly because the announcement of the Pilot acquisition mentioned Berkshire Hathaway’s capital and ability to expand, and TravelCenters may be one acquisition it is eying.

However, I doubt the usefulness of a truck stop/gas station in a future that is going electric and self-driving.

Going Electric

I find it extremely ironic that Buffett made this acquisition in the same month that Tesla planned to unveil its electric, self-driving semitruck. Granted, it is several years away from being operational, but the fact remains that in five years, almost all of the new cars being released will be electric, as indicated by the major automobile manufacturers.

I’m sure Buffett has thought about this, and still finds the real estate that Pilot owns to be a worthy acquisition. But to me, in just five years this is a company that will be searching to find its place in a world that is going electric and autonomous.

Does Pilot just become a place to stop on long trips and use the restroom? Somewhere to get junk food? Or will it be branded as a completely different use? I don’t know.

But I do know that when major manufactures like Ford, General Motors and BMW make the shift over the next few years to an almost entirely electric and automatic fleet, the amount of charging stations will multiply. And I may be five years off, but that brings up Buffett’s 10-year time frame, and I don’t know what a gas station will be like in 10 years.

I just know it won’t be your typical gas station anymore. Because instead of having to stop at a gas station before you get home, you’ll simply charge up at your house.

And instead of having to stop for gas after a 300-mile trip, you’ll simply pull into the hotel and charge up while you stay there.

So this is not an investment I would want to own for the next 10 years. And I think trading TravelCenters is a risky bet at the moment too.

If you buy it, you’re hoping Berkshire Hathaway has its sights set on that company. Because if it doesn’t, TravelCenters will likely fall back. But betting against it is too much of a risk because of the possible acquisition.

For now, this is simply not the investment to follow Buffett on. And I don’t say that often.


Chad Shoop, CMT
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