Investing in the Apple Economy

 | Sep 20, 2012 | 1:00 PM EDT
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Forget the U.S. economy or even the U.S. stock market for the moment. Apple (AAPL), which is approaching a nearly $700 billion market cap and climbing, has created its own economy, and it boggles the mind. 

Yesterday I was asked a trivia question about how much money was spent on repair work for the iPhone since it was launched in 2007. The answer: $5.9 billion. That's over $1 billion a year that consumers are spending on repairs of single device. The vast majority of U.S. corporations aren't even close to generating $1 billion in annual revenue.

It's well known that the iPhone and iPad include hundreds of various parts that are sourced and produced from several different businesses. And with iPhone 5 pre-orders breaking all kinds of records, Apple is not going to be the sole beneficiary of the continued iPhone craze. Perhaps it's time to look not only at Apple but at those businesses that are responsible for what goes inside Apple's products.

Chipmakers Qualcomm (QCOM) and Broadcom (BRCM) have been supplying the iPhone with many critical chips for years. Since the first iPhone was introduced in January 2007, Broadcom's shares are up about 15%, while Qualcomm's shares are up more than 60%, compared with a nearly 30% lift in the Nasdaq.

I would argue that Qualcomm and Broadcom really didn't start benefiting from iPhone sales until a year or so after the iPhone's release, when the phone's popularity began to really take off. The initial indication is that the new iPhone 5 is going to break all past records, and that should undoubtedly boost the fortunes of iPhone part suppliers.

An even bigger winner during that time has been South Korea's Samsung, another chip supplier, which is up more than 80% since the first iPhone was released.

What I would refer to as second-tier names (for now, perhaps), would be small-cap names such as RF Micro Devices (RFMD) and TriQuint Semiconductor (TQNT). TriQuint is the leader in high-performance radio-frequency components for wireless communication. The company's RF chips have been used in the most recent versions of Apple's iPhone and iPad. As newer versions of the iPhone and iPad continue to increase in popularity, revenue for names such as TriQuint could experience above-average growth.

Even conservative investors can participate in the rapid growth of the Apple economy as bellwether carriers such as Verizon (VZ) and AT&T (T) benefit from the latest smartphone versions. Newer mobile devices tend to spur users to use and transmit more data, and that translates in higher average revenue per user (ARPU) for carriers. Verizon shares trade for $45 and still yield 4.6%, while AT&T yields a similar 4.7%. Since 2007, shares in Verizon and AT&T are up 20% and 8%, respectively, compared with nothing for the S&P 500. When you add in the 5% annual dividend yield, investors have enjoyed prosperous returns in a very flat market.

Apple shows no signs of letting up anytime soon. Naturally, Apple itself has been the best investment in the Apple economy, up 75% in 2012 and up more than 600% since the release of the first iPhone. It really does have a legitimate shot at being the first trillion-dollar market-cap company, and deservedly so, considering how mobile the world has become. As Apple continues to make its historic ascent, a lot of supporting businesses will be taken along for the ride, thus creating a mini stock market where the member companies grow in accordance with the economic growth in Apple. 

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