Apple (AAPL) Awards $390M To Finisar For Laser Production

Apple Inc. (NASDAQ:AAPL) announced that it has awarded $390 million to one of its chip suppliers, Finisar, for the production of advanced semiconductor lasers used in iPhone X's True Depth facial recognition camera.

The award (and not any debt/equity investment as clarified by Finisar) was made from Apple’s $1 billion advanced manufacturing fund.

The fund was announced after U.S. President Donald Trump criticized the company for not creating enough manufacturing jobs in the United States and instead focusing on other nations. In May, in an interview with CNBC, CEO Tim Cook had mentioned that the company is setting up the fund to boost employment in advanced manufacturing in the home country.

Reportedly, the funding in Finisar is expected to increase its R&D spending. It will also increase production of the vertical-cavity surface-emitting lasers (VCSELs) required in True Depth camera’s latest features such as Face ID, Animoji and Portrait mode selfies.

Per the latest blog post, “In the fourth quarter of 2017, Apple will purchase 10 times more VCSEL wafers than were previously manufactured worldwide over a similar time period.”

Apple’s award is also anticipated to create over 500 high skill jobs at Finisar’s newly acquired factory located in Sherman, TX. The factory is expected to start functioning in the second half of 2018.

This is the second award made by the company from this fund. Prior to this, it had invested $200 million in Corning Inc. (NYSE:GLW) .

Notably, shares of Apple have gained 48.8% year to date, slightly outperforming the industry’s 47.6% rally. Shares of Finisar also surged post the announcement.

Further Push in AR

Apple is riding on its Augmented Reality (AR) initiatives. The company has bought several smaller firms with expertise in AR hardware, 3D gaming and virtual reality (VR) software. Apple also unveiled the ARKit at WWDC this year that will help third-party developers to work on creating AR experiences for the iOS platform.

On the last earnings call, Cook mentioned, “we believe AR is going to change the way we use technology forever.”

Per analyst Gene Munster as quoted by Bloomberg, “This investment shows the company is doubling down on AR again, and locks down the VCSEL market, which will make it tough for other smartphone players to compete in AR."

The limited supply of VCSEL is a major headwind for smartphone makers. The analysts believe that the funding will ensure smooth supply of the technology for Apple while creating a bottleneck for other players in the market like Samsung (KS:005930) and Huawei, thereby giving Apple a competitive edge in this regard.

According to market research firm IDC’s August report, quoted by Business Insider, total spending on AR/VR is expected to soar from $11.4 billion in 2017 to nearly $215 billion 2021 at a CAGR of 113.2%. This provides significant growth opportunity for technology giants like Apple.

Moreover, we note that Apple has been subject to intense scrutiny by Donald Trump regarding the “manufacturing” issue. These initiatives will help it to gain the confidence of the government, in our view.

Zacks Rank and Stocks to Consider

Apple carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector include IPG Photonics Corporation (NASDAQ:IPGP) and NVIDIA Corporation (NASDAQ:NVDA) , both sporting a Zacks Rank #1 (Strong Buy). You can see You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth rate for IPG Photonics and NVIDIA is projected to be 19.7% and 10.3%, respectively.

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