Morgan Stanley Cautious on Apple (AAPL) Suppliers; 'This Looks More Severe than Simply Weaker iPhone X'
Morgan Stanley issued a cautious note on Apple (NASDAQ: AAPL) suppliers noting iPhone weakness is driving a sharp inventory correction. Moore said the disappointing iPhone units combined with an inventory overbuild should continue to have a pronounced impact on Apple suppliers and the smartphone segment more broadly.
"Apple's weaker units, and weaker aggregate smartphone units overall, create some obvious concerns for semis, and looking at its balance sheet, channel inventory, and off balance sheet purchase commitments elevate those concerns
further," he commented.
He sees obvious risk to names with high Apple concentration.
Further, the analyst said this looks more severe than simply weaker iPhone X, given that Apple on and off-balance sheet component inventory hit new highs. "As reported by our Hardware team (led by Katy Huberty) in a separate note this morning, the combination of reported balance sheet inventory and vendor non-trade receivables (component inventory transferred to manufacturing partners) increased 41% Q/Q in December 2017, the highest sequential increase since 2013, and above 12% average seasonality over the prior three years. As a result, total non-vendor trade receivables and inventory on the balance sheet is up $15.2B Y/Y," he commented. "The bulk of the increase was driven by vendor non-trade receivables (Apple buys components and sells them to its manufacturing partners); our understanding is that this at least partially represented a broadening out of these purchasing arrangements to more suppliers, but the magnitude still suggests some inventory build. This indicates to us that Apple will likely continue to draw down inventory from here, with the key questions around magnitude."
Commenting on how this affects semiconductor fundamentals, he cites:
1) Significant pressure on RF growth and $ content mix
2) Memory implications - though near term conditions appear reasonably healthy, this inventory will not ease recent concerns.
3) A risk to the broader semi cycle.
The analyst remains cautious on Skyworks (NASDAQ: SWKS) and see some risks to the broader semis cycle, though memory data points are conflicting.
Other Suppliers to Watch:
- Analog Devices (NASDAQ: ADI)
- Amphenol (NYSE: APH)
- Broadcom (NASDAQ: AVGO)
- Cirrus Logic, Inc. (NASDAQ: CRUS)
- Cypress Semiconductor (NASDAQ: CY)
- Micron (NYSE: MU)
- NXP Semiconductors (NASDAQ: NXPI)
- ON Semiconductor (NASDAQ: ON)
- Qorvo (NASDAQ: QRVO)
- Sensata Technologies (NYSE: ST)
- TE Connectivity (NYSE: TEL)
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