My Friend, My Enemy
A decade or so ago, Apple Inc. (NASDAQ:AAPL) partnered with Samsung to get parts for its new music player, the iPod. That proved beneficial for both companies as demand for the device exploded. As Apple moved on to the iPhone, Samsung went along for that ride, too.
That’s when something funny started to happen between these two friends. Samsung began to make competing products. Lawsuits followed and the relationship began to sour. However, switching suppliers for high-end tech gear isn’t easy. So Apple was stuck with its “frienemy.”
Getting More Aggressive
Apple Inc. (NASDAQ:AAPL) has been trying to shift away from such tense relationships. For example, Google Inc (NASDAQ:GOOG) apps were must-haves on early iPhones. But Apple has been trying to free itself from its reliance on the maker of the competing Android operating system.
One of its first attempts was the removal of the Google Maps app. It was a disaster for Apple Inc. (NASDAQ:AAPL) because the company’s own maps app didn’t live up to customer expectations. Learning from that lesson, Apple is set to use Microsoft Corporation (NASDAQ:MSFT)’s Bing search tool for just the Siri digital assistant.
It basically farmed out search to a company with experience in the search space and did so on a small scale so a failure wouldn’t blow up in its face. It’s done the same thing with Foxconn, one of its main assembling partners. Although Foxconn still makes most of the company’s high-tech gear, a portion of the new iPad Mini production is being handled by another company.
The Heart
That’s harder to do with chips. The computer chip is the heart of any device; get that wrong and the device won’t work right. So it’s taken longer for Apple Inc. (NASDAQ:AAPL) to find the right partner. It looks like Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), however, has stepped to the plate.
Taiwan Semi won’t replace Samsung, at least not overnight, but it does give Apple an alternative supplier with which it can grow. That’s an important shift for Apple, though it still remains reliant on Samsung for other components, like screens.
Big Opportunity
Although getting Bing into the Apple Inc. (NASDAQ:AAPL) family of products touches just a small part of Microsoft Corporation (NASDAQ:MSFT)’s business, it is part of a bigger push. Microsoft is looking to get a seat at the mobile table with its Windows Mobile product. Unseating old friendships is a good way to start the process. In fact, Samsung is looking to launch its own mobile OS to limit its reliance on Google, much the way Apple Inc. (NASDAQ:AAPL) is trying to limit its reliance on Samsung. If that launch doesn’t go well, Microsoft could find itself an opening to partner with Samsung.
Microsoft shares have started to head higher as investors begin to see its mobile pivot taking hold. Spending on this effort has restrained the bottom-line somewhat, but the top-line has continued to expand since dipping during the 2007 to 2009 recession. Moreover, with earnings of around $2 a share in 2012, some near-term margin compression is a small price to pay to ensure longer-term success.
An around 2.6% dividend yield backed by a decade of annual dividend hikes should make these shares interesting to growth and income investors.
The Heart
Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), meanwhile, could be on the verge of a new growth phase. Its top and bottom lines dipped during the recession and have since recovered nicely. The chip business tends to be highly cyclical. As the largest chip foundry, however, it has been reliably profitable where others tend to vacillate between red and black ink.
That said, if Apple continues to shift production to Taiwan Semi and away from Samsung, Taiwan Semi will have found a massive new customer. That could take revenues and earnings up a notch. With a PE of around 18, Taiwan Semi isn’t cheap, but it could be a good option for growth investors who see its new partnership as a catalyst to growth. An around 2.2% dividend yield is icing on the cake.
Suffering
Samsung shares have fallen of late as investors question its ability to attract new customers in mature mobile markets. Apple Inc. (NASDAQ:AAPL) shifting to a new supplier is another headwind to face. And the company’s efforts to build its own mobile OS is a big risk, too.
Samsung’s top-line has more than doubled over the last half decade, but that’s a feat that will be hard to repeat with so many headwinds. Although the high single-digit PE is reasonable, with investor sentiment turning, now isn’t the time to buy Samsung.
Changing Allegiances
Apple Inc. (NASDAQ:AAPL) is a big fish to hook for Taiwan Semi, which changes the outlook for that company. Investors should take note. Shifting allegiances, however, should also help Microsoft over the long term. Samsung, meanwhile, looks like its damaged friendships could quickly become a problem.
The article A Tech Giant Reconfigures its Supply Chain originally appeared on Fool.com and is written by Reuben Brewer.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
