Apple (NASDAQ: AAPL) slashed its outlook for the December quarter last night, dragging down broad swaths of the market and many of its suppliers in particular. The news comes as the market has already been grappling with skyrocketing volatility, and Apple's announcement only exacerbates fears of a potential recession on the horizon. Many suppliers have been issuing their own warnings over the past couple of months. For example, Lumentum, which provides 3D-sensing components, cut its guidance in November -- just two weeks after providing its initial forecast.
Among the most battered Apple suppliers today are:
- Universal Display (NASDAQ: OLED), down 13%.
- STMicroelectronics (NYSE: STM), down 12%.
- Skyworks Solutions (NASDAQ: SWKS), down 11%.
Universal Display's prospects get dimmer
Apple's adoption of OLED was a long time coming, and 2017's iPhone X was the first Apple handset to feature an OLED display. The iPhone maker expanded that to two models in 2018, with both the iPhone XS and larger iPhone XS Max utilizing OLED technology, while the more affordable iPhone XR still uses a traditional LCD display. "Also notable was Apple moving from one model with an OLED display last year to two models with OLED screens this year," Universal Display CEO Steve Abramson said on the third-quarter earnings call.
iPhone XS and XS Max both feature OLED displays. Image source: Apple.
As the central supplier of OLED intellectual property as well as materials that go into OLED displays, investors had high hopes for Universal Display following increased uptake at Apple. Unfortunately, both third-quarter earnings as well as guidance for the fourth quarter disappointed investors. The upside related to smartphones simply didn't materialize to the degree that management had hoped. CFO Sidney Rosenblatt conceded, "We did see a pickup in the smartphone market driven by a number of new OLED mobile launches, but the magnitude of a pickup to our material sales was not to the degree that we had earlier anticipated."
More specifically, there's a good chance that Apple's most expensive models -- which are the ones that have OLED displays -- are the iPhones that are underperforming. That's bad news for Universal Display.
Image source: Apple.
STMicro thought things would get better
STMicroelectronics has been a prominent Apple supplier for many years and enjoys several design wins in the latest flagship devices. Apple's adoption of OLED also gave STMicro another spot to occupy: the OLED power management chip. The European chipmaker also provides other components, like microcontrollers related to eSim capabilities, as well as sensors related to Apple's TrueDepth camera system.
The company warned earlier last year that the slowing global smartphone market could weigh on the business, but STMicro expected things to pick up in the second half of 2018. "Despite the weak demand we are experiencing for smartphones in the first half of 2018, we anticipate second quarter and first half revenues to grow year-over-year about 17.5% and 19.8%, respectively, at the mid-point of our guidance range," CEO Carlo Bozotti said in a statement last April.
Bozotti then added, "For the second half of the year, we see healthy demand, with a strong backlog across all our product groups, end markets, including smartphones, and regions."
Apple accounts for an estimated 10% of STMicro's revenue.
Nearly half of Skyworks' revenue comes from Apple
Skyworks was already having a tough year, well before the broader market started tanking in October. Skyworks provides things like power amplification models, RF switches, and GPS amplifiers in the iPhone XS, and has supplied similar components in previous-generation models. The company has been trying to diversify its business into areas like the Industrial Internet of Things (IIoT), autonomous vehicles, streaming, and virtual reality, but it still relies heavily on smartphones for the bulk of sales.
"Skyworks' continued strength in broad markets coupled with the launch of a diverse set of high performance mobile solutions is offsetting unit declines in premium smartphones and overall China softness," CFO Kris Sennesael said in a statement in November.
However, Apple represented nearly half of revenue in fiscal 2018, up from previous fiscal years, evidence that even as Skyworks makes progress diversifying, it is still heavily reliant on the Cupertino tech giant.
Apple Contribution to Net Revenue
Data source: 10-K.
Of these three suppliers, Skyworks has by far the greatest exposure to Apple.
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Evan Niu, CFA owns shares of Apple and Universal Display. The Motley Fool owns shares of and recommends Apple, Skyworks Solutions, and Universal Display. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.