Key excerpts follow:
- iPhones: Big positive revisions to 3Q and 2008 build forecast. Our latest checks show forecasted calendar 3Q and 2008 iPhone build volumes have been revised significantly higher, with more than 15 million 3G iPhones plus two million old 2G iPhones forecast for 2008. With about seven million incremental units being built in 3Q versus 2Q, this data clearly has positive implications for iPhone chip suppliers (Broadcom (BRCM), Marvel (MRVL), Infineon (IFX), Skyworks (SWKS)). 2Q build volumes were cut by 25% versus our prior checks in mid-May (now up only 80% QOQ) as Apple pushes production out a bit into 3Q. This 2Q build volume cut only serves to improve the sequential growth prospects for these products in 3Q.
- iPods: 3Q iPod builds revised higher; 2Q build volumes largely unchanged. Recent checks show Apple's 3Q iPod build volumes were revised up by 15% since our last check and are now set to grow 35% sequentially. Greater Classic and Nano builds are partially offset by fewer Touch builds. 2Q build volumes remain largely unchanged, growing 35% sequentially. We hear a new, lower priced Nano may be coming, as well as refreshed versions of the Touch and Classic. It seems likely that both BRCM and MRVL will have content in the refreshed iPod Touch, though we await firm details on this.
- PCs: 3Q builds revised higher for both notebook and desktop; 2Q build volumes largely unchanged. Recent checks show Apple's 3Q notebook and desktop build volumes were revised up by 10% and 20%, respectively, since our last check. Notebook and desktop build volumes are now set to grow 35% and 20% QOQ, respectively. For 2Q, we saw a very slight 5%-10% reduction in desktop build volumes, with notebook build volumes stable versus our prior check. Higher 3Q PC builds are a positive for BRCM and MRVL, both firms that have exposure to Apple's PC products.
- Implications for BRCM and MRVL are positive; Apple product cycle continues to gain momentum. The implications for Apple chip suppliers Broadcom (Outperform $36 target) and Marvell (Outperform $23 target) are positive due to the large positive revisions to the 3G iPhone build forecast and due to higher PC build revisions for 3Q. With seven million incremental iPhone builds in 3Q versus 2Q, we think this will contribute an extra 3% sequential growth for Broadcom in 3Q (at $4-$5 of chip content per iPhone) and will contribute an extra 2% sequential growth for Marvell in 3Q (at $2-$3 of chip content per iPhone). For Apple, the firm continues to knock the cover off the ball in terms of product innovation, sleek designs, attractive price points, and effective global deployment plans. These checks confirm Apple's product cycle momentum continues to gain steam.
- Positive on chip stocks given stable demand trends, normal inventory levels, and attractive valuations. Channel checks over the past month could be characterized as ranging from stable to robust (PCs and networking & communications). Only LCD TVs, DVD players, and handsets remain somewhat soft due to weak consumer spending. Stable foundry checks, stable to positive PC build revisions, and stable distributor checks all suggest that global demand trends are not deteriorating. With the SOX still below 400, we once again think chip stocks are poised to outperform the broader market as business trends are stable or better, inventories remain normal, and chip valuation multiples are still attractive. We think the SOX semiconductor index grinds higher in the coming quarters, likely towards the 475 level. Our favorite long ideas, in order of preference, are Marvel (MRVL), ON Semiconductor (ONNN), Fairchild Semiconductor (FCS), Microsemi (MSCC), Broadcom (BRCM), International Rectifier (IRF), Silicon Laboratories (SLAB), and Atmel (ATML).