How To Profit From Apple's iPhone!

Semiconductor stocks have had a tough year.  After a strong end of year rally in 2010, chip stocks peaked in late February 2011.  And it's been all downhill ever since.

Take a look at this industry chart...

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As you can see, semiconductor stocks have been on a downhill slide for most of the year.  And they really fell off a cliff during the recent market downturn.  At the early October lows, chip stocks were a hefty 32% off the February 52-week high.

But the selling finally gave way to bargain hunting over the past couple of weeks.  With the European debt and banking crisis seemingly under control (for now), investors are charging back into the beaten down chip sector.

However, there's more to this story than just a potential resolution of Europe's troubles.

Another recent event also helped spark heavy buying in chip stocks.  Of course, I'm talking about the recent launch of Apple's (AAPL) new iPhone 4S.

The latest model of Apple's revolutionary smartphone is breaking sales records left and right.

During the first three days of the launch, Apple sold over four million units.  That's more than double the number of iPhone 4 sales during its first three days.  A huge feat considering the iPhone 4 is Apple's best selling product.  In fact, more iPhone 4's have been sold than all previous versions of the iPhone combined.

That makes the iPhone 4S the fastest-selling iPhone... EVER!

While that's great for Apple, it's also terrific news for a small group of chip makers who supply the components used inside the new iPhone 4S.  These companies stand to make tons of money as iPhone 4S sales continue climbing.

And one of these companies looks like a great buy at current prices. Introducing, Avago Technologies (AVGO).

Avago is a designer, developer, and global supplier of analog semi-conductors with a focus on III-V based products.  III-V semiconductor materials have higher electrical conductivity, which enable faster speeds. And they tend to perform better than conventional silicon applications such as RF and optoelectronics.

Word is every iPhone 4S contains an Avago ACPM-7181 power amplifier.  A power amplifier is a device that boosts a radio signal prior to transmission.

But what makes Avago's product unique is its ability to support both 2G and 3G cellular technologies across multiple brands.  This capability helps reduce the number of components and PC board footprint required.  And it allows the iPhone 4S to work across global wireless systems.

Most importantly, Avago's single device performs functions that were previously provided by three separate components in the iPhone 4.  As a result, Apple now has a real technology lead over other manufacturers.

But inclusion of the device in the iPhone 4S is an even greater boon for Avago.

Up til now, the company has been viewed as a second-tier supplier behind Skyworks Solutions (SWKS), RF Micro Devices (RFMD), and TriQuint Semiconductor (TQNT).  Now with the iPhone design win safely in their pocket, Avago is expected to move up to first-tier supplier status.

So, is the stock a buy?

I think AVGO is a good buy at current levels.  After rallying on the iPhone 4S launch, the shares have pulled back to the 200-day moving average. This has been a great place to buy the shares in the recent past.


As you can see, the stock has bounced off the 200-day moving average twice before.  Each time, the shares have rallied for substantial gains. Until this trend is broken, I expect more of the same for this exciting chip maker.

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