3G iPhone Presents Stealth Opportunities

Need help with your Mac, iPod or iPhone? Contact Victor Orly!
(310) 891-6820 x101 or email vicblog@orly.com

One of the first events to follow the debut of the Apple (AAPL) 3G iPhone, whenever that happens, will be the ritual ripping apart of the device by various analysts to figure out who is making the guts of the thing. Since no one had a 3G iPhone yet - heck, Apple has not even officially said there will be one - it would be a challenge to do a tear down just yet. But Craig Berger, of Friedman, Billings Ramsey, today took up the challenge.

Berger said some digging with supply chain sources finds that most of the component suppliers will be comparable those in the existing EDGE version of the phone. Here's a rundown on what he thinks will be found inside:

Broadcom (BRCM), he says, keeps the touch screen controller socket in the 3G iPhone and a potential iPod Touch refresh design. He also thinks the company could have a Bluetooth/WiFi combo chip in the next iPod Touch.

Marvell (MRVL), Berger says, likely keeps the 802.11 WiFi socket in the iPhone, but may have lost the WiFi socket in the Touch to the Broadcom combo chip mentioned above.

Infineon (IFX) and Samsung "remain overall device winners," he says. Berger says Infineon may be providing the 3G baseband chip, the RF transceiver, a power management chip. (The company supplies the EDGE baseband chip in the current iPhone.) Samsung is likely to provide the application processor, as it does in the current phone.

NXP and Texas Instruments (TXN) "also have peripheral smaller sockets in the 3G iPhone," he writes. ))
My take on all this:

First, this is all speculation, but isn't that what we do? We won't have a real life tear down until either a beta or the real deal's released. Based on what's in the current phone and the fact that AAPL will want to maximize manufacturing efficiency, the number of significant changes to the 3G iPhone will likely be kept to a minimum, though I think the 3G version may yet hold a surprise or two. Note the BRCM and MRVL commentary.

IFX: this stock is currently dirt cheap and, as speculated above, could be a big winner from a 3G iPhone. However, IFX has been weighed down by various items, not the least of which is continuing writedowns of its QI ownership, which got even uglier yesterday. However, even while IFX's book value is declining due to these writedowns, the stock is still trading below book and IFX just reaffirmed FY'08 EBIT. Given a revenue growth catalyst the shares may find a foothold after declining to multi-year lows recently and digesting the latest writedown from QI. The worst case is that IFX may be a value trap, but downside (after the latest writedown), should be limited. On any more weakness the risk reward profile looks pretty compelling here.

InterDigital (IDCC): While IDCC has been embroiled in patent disputes with Nokia (NOK), it doesn't seem to have these issues with AAPL, who's paying them for the current iPhone and AAPL signed a seven-year deal with IDCC related to the current and future versions of the iPhone. Based on IDCC's much stronger 3G portfolio, it's probably well positioned to generate even higher royalty fees from the 3G iPhone. As I mentioned previously, this name could be one of the best, if not the best, tertiary plays on the coming 3G iPhone. Note that IFX's 3G chips carry licenses from IDCC.

Logitech (LOGI): This company just reported overnight with another very solid quarter and cited various products that benefit from the AAPL food chain. Stock is cheap with solid growth, lots of cash and the company mentioned it's not seeing negative experience from the reported slowdown. In fact, it reported solid growth in its U.S. markets. Bottom line, if the 3G iPhone is the huge hit I think it will be then LOGI that will get some solid downstream sales.

BRCM: As mentioned above, it makes the chip that is key to making all that cool touchscreen technology happen. If BRCM wins even more slots that certainly doesn't hurt. One slot the analyst doesn't mention is for GPS. I would be surprised if a 3G iPhone doesn't include GPS and I think BRCM has better than a 2/3 shot at winning this as well.

Moreover, as I've speculated before, I think it's just a matter of time before we see AAPL incorporate its touchscreen technology into its Mac lineup, most likely starting with laptops. This would be a leap in the evolution of GUI (graphical user interface) related to computing, and after years of the mouse, we are due. This would be simply huge for AAPL and BRCM.

MRVL doesn't generate a lot of revenue from the iPhone. However, I thought that the iPhone might initially carry the core application processor from MRVL (based on Xscale purchased from Intel (INTC) ), instead of Samsung. As it turns out, I wasn't alone with this assessment.

Anyway, MRVL supplies this for Research in Motion (RIMM) and I'm still holding out hope that the die is not cast for Samsung. At this point it doesn't look like there's any expectation for MRVL to win this business, so if it did, MRVL could see a significant move higher.