Apple's Vertical Integration Policy To Hurt These 3 Suppliers

Apple Inc. (NASDAQ:AAPL) is no doubt a valued customer to have but its recent actions are increasingly speaking otherwise.

The recent revelation per a Bloomberg report that Apple will utilize its own chips phasing out Intel’s chips in Mac by 2020 has sent ripples across its supplier base.

We believe Apple’s focus on building a closed ecosystem of semiconductor solutions for its own usage will hurt suppliers like Infineon Technologies (OTC:IFNNY) , Cirrus Logic (NASDAQ:CRUS) and Qorvo Inc (NASDAQ:QRVO) .

Apple to Gain From Vertical Integration

Apple’s decision to use its own processors in Mac is expected to improve margins. Becoming self reliant will also reduce the company’s dependence on its suppliers, consequently improving time to market.

Apple already develops co-processors for Mac that manage hardware's camera, OLED Touch Bar, boot process and fingerprint sensor.

Moreover, the company uses its in-house developed display timing controller chips, fingerprint sensors, Bluetooth audio processors, flash memory controllers and mobile SoCs.

Apple Policy to Hurt Suppliers

However, Apple’s aggressive vertical integration policy is a significant headwind for its suppliers.

Last year the company had announced that it will do away with graphics chip of Imagination Technologies, a British company by 2019 for its own.

Moreover, the U.K.-based chip company, Dialog Semiconductor which supplied Apple its power management chip for iPhone shared the same fate, last year. The company used to generate almost 74% of its revenues from Apple.

Few weeks back, a Bloomberg report revealed that Apple is developing MicroLED screens in its own facilities in California and Taiwan. The move had hurt its display and related component suppliers namely Samsung (KS:005930), Sharp, LG Display, Corning and Japan Display.

Currently, Apple carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

3 Suppliers At Risk

Investors remain more sceptical of the suppliers which depend on the iPhone maker for a significant portion of their total revenues. So, if Apple further strengthens its in-house model, tides might turn against these three suppliers.

Infineon furnishes cellular basebands to Apple which forms the core chipsets that are used in iPhones. Requirement of large capital investments in order to maintain a competitive cost position remains a woe for this Zacks Rank #4 (Sell) stock.

Cirrus is another such stock. The company generates majority its revenues through selling audio amplifier chips used in iPhone devices. Dismal sales of iPhone X and Apple’s recent decision to cut down productions of the device is likely to impede this Zacks Rank #5 (Strong Sell) stock’s near-term results.

Qorvo, a provider of radio frequency chips to Apple, also falls in the same category. Apple accounted for 34% of company’s total revenues in fiscal 2017. Moreover, intensifying competition creating low barriers to entry have plagued this Zacks Rank #4 stock.

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