Apple Suppliers Struggle Amid iPhone 'Demand Pause,' Upgrade Concerns
Shares of Cirrus Logic (CRUS) - Get Report and Skyworks Solutions (SWKS) - Get Report are sliding after Pacific Crest analyst Michael McConnell downgraded both to Sector Weight, a neutral-equivalent rating, citing concerns about Apple's (AAPL) - Get Report upcoming "iPhone 7." Furthermore, Citi analyst Jim Suva lowered his quarter estimates for Apple in a separate note this morning on similar concerns and to reflect a pause in demand and lengthening iPhone replacement cycles.
IPHONE 7 CONCERNS: Following his firm's quarterly Asia supply-chain checks, Pacific Crest's McConnell downgraded both Cirrus Logic and Skyworks Solutions to Sector Weight from Overweight. The analyst said concerns about Apple's next iPhone, dubbed "iPhone 7," put the estimates of both Apple suppliers at risk. McConnell noted that while feedback from Asia increased his confidence that Cirrus Logic will be "one of the biggest" beneficiaries in terms of content in the iPhone 7 due to a potential transition to digital headsets, he does not expect it to be enough to offset a 15%-20% decline in new iPhone shipments in the second half of 2016. The analyst said Skyworks faces similar headwinds, adding that he is also "increasingly concerned" that an inventory correction at Huawei and share loss to Murata could mute the company's estimates further this year. Furthermore, McConnell believes Skyworks' 10%-15% increase in Radio Frequency content going forward will not be enough to offset another "disappointing" iPhone cycle. The analyst reiterated a $33-$36 fair value range on Cirrus Logic's shares and $60-$67 fair value range on Skyworks' stock.
DEMAND PAUSE: In a separate note to investors this morning, Citi's Suva lowered his June and September quarter estimates for Apple to reflect the "demand pause" ahead of the iPhone 7 launch as well as macro uncertainty related to the Brexit vote and lengthening replacement cycles. The average iPhone replacement rate has gone from 24 months in 2013 to 28 months recently, and the rate could extend to 30-36 months, Suva told investors. The analyst said he expects Apple's shares to remain range-bound in the near-term, but reiterated a Buy rating and $115 price target on the shares.
APPLE SAID TO BE PRESSURING SUPPLIERS: According to an article published today by DigiTimes, Apple has been cutting quotes for its existing upstream component suppliers and seeking new component suppliers as it works to maintain its high gross margins in the face of slowing global smartphone shipments. Cirrus Logic and Skyworks are among Apple's key suppliers.
PRICE ACTION: In morning trading, Cirrus Logic's shares have slipped about 6.5% to $35.60, while Skyworks Solution's stock has dropped about 5% to $59.40 per share. Meanwhile, Apple's shares have dropped over 1% to $94.84 this morning.
Reporting by Jessica de Sa-Mota.
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