Apple Suppliers Estimates Already Reflect Expectations For Delays To OLED iPhone

KeyBanc Capital Markets said in a note released last weekend that the consensus estimates for Apple Inc. AAPL suppliers Broadcom Ltd AVGO, Cirrus Logic, Inc. CRUS, Cypress Semiconductor Corporation CY and Skyworks Solutions Inc SWKS already reflect expectations for a delay in the new OLED iPhone.

Accordingly, the firm recommends owning Apple supplier stocks despite the uncertainty associated with the fingerprint issue.

Workaround Not Working

Analysts led by Andy Hargreaves said they believe Apple is struggling with fingerprint solution, and therefore, has switched from an optical fingerprint sensor to a workaround using capacitive sensing. That said, the analysts indicated that poor performance through the cover glass and issues in laminating an ITO layer have prevented the company from moving the OLED iPhone to production.

Likely Scenarios In The Event Of No Solution

KeyBanc is of the view that Apple should be ordering fingerprint ICs before August if the new iPhone production is to reach the volume required for a holiday season launch. If Apple doesn't find a solution for the issue, the firm sees two possibilities:

1. Abandon the fingerprint sensor in favor of facial recognition for login and authentication.
2. Delay the iPhone launch.

In the former scenario, the firm sees the risk of pushback from consumers, as it would mean that several times a day, the new iPhone would perform worse at an elemental feature than older iPhones. Additionally, the firm feels an initial lack of Apple Pay due to the non-availability of the fingerprint sensor could adversely affect demand.

Meanwhile, KeyBanc thinks a delay is very unlikely, although it is possible if Apple is convinced facial recognition is insufficient by itself for login and authentication.

"A delay up until mid-November would not likely have a meaningful impact on our expectations for the cycle," the firm opined (see Hargreaves' track record here).

"Beyond this, we would expect mix and total unit volume for F2018 to be meaningfully affected."

Safe Until Third Quarter

The firm believes Apple has front-loaded the ramp of LCD iPhones, allowing key suppliers to guide for normal 3Q ramp. However, the firm is uncertain about the fourth-quarter outlook, suggesting that it would depend on what Apple decides in the coming weeks.

Beyond 3Q Margin Impact Seen

KeyBanc believes the fingerprint issues in the OLED iPhone may result in Apple abandoning at least one major technology investment and intense use of first-and-third party engineering resources. This, the firm, feels will raise costs above its current expectations, putting its fiscal year 2018 gross margin at risk.

As such, KeyBanc remains Sector Weight on Apple and is Overweight on component suppliers Broadcom, Cirrus Logic, Cypress Semiconductor and Skyworks Solutions.

Price Targets

• Broadcom: $280
• Cirrus Logic: $75
• Cypress Semiconductor: $17
• Skyworks Solutions: $120

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