Analyst: Avoid Apple and Samsung’s supply chains

Includes a helpful list of stocks not to buy.

From a note to clients by Rosenblatt’s Jun Zhang that landed on my desktop Thursday:

We believe Samsung’s supply chain faces increasing inventory risks. We expect some component inventory at Samsung to reach ~8-weeks, higher than the normal 4-week inventory level. In addition, we believe Samsung’s smartphone shipments may decline 8-10% y/y in Q4 due to weak sales for the Samsung Note 9 and midend products. We believe the weak sales are mainly due to Samsung losing share to Chinese OEMs in many markets, including the European markets.

We believe Apple’s supply chain may also face risks after the holiday season. We believe this is due to weak iPhone XS sales, as well as weaker than expected iPhone XR preorders. Apple’s initial component orders have been conservative, however, leading us to believe there is more likely to be a small correction in the Apple supply chain around the holiday season.

Overall, we suggest investors avoid smartphone supply chain companies. We highlight our cautious view on Universal Display, Skyworks, Qorvo , Synaptics, Dialog Semi, Cirrus Logic, AAC Technologies, Sunny Optical, and Mediatek. We believe STMicroelectronics and Maxim’s business at Samsung may also face some inventory correction risk.

My take: I’d worry more about Samsung’s suppliers.

7 Comments

  1. Horace Dediu said:
    That and the connection between China and Greenland in the map are fascinating.

    2
    October 25, 2018
    • David Emery said:
      Samsung needs a place to sell their smart refrigerators 🙂 🙂

      0
      October 26, 2018
  2. Kathy Corby said:
    Quite true, Robert– I am of the opinion that these next two quarters will play out largely as did the quarter after the introduction of the iPhone X– surprising to the upside in unit growth/ sales. Nevertheless, after having fallen prey early in my investing career to the naive assumption that Apple suppliers would do well if Apple did, I realized that the opposite is often the case: one of the reasons Apple does well is that it has few scruples about squeezing its suppliers to within a hairsbreadth of profitability. Apple’s margin gains are, after all, their loss. So the caveat to avoid Apple suppliers is a word to the wise.
    (Incidentally, to me it makes sense to take the quarter just past and the current quarter as a unit, since the staggered introduction of the iPhone models will likely raise ASPs for the FY4thQ at the expense of units sold, and lower ASPs for the current quarter, as massive sales of the iPhone XR roll in — higher volume, lower sales price.) Sadly, the Street is blind to these subtleties, so we will have to deal with the quarterly results and their fallout separately.

    3
    October 25, 2018
    • Robert Paul Leitao said:
      Kathy:

      I agree and appreciate your descriptive prose about Apple’s relationships with its suppliers. I also have come to the hard-earned conclusion if one desires to invest in Apple’s success the best investment is an investment in Apple.

      To my knowledge, Apple contracts for production capacity whether or not the suppliers are tasked with delivering product up to that capacity. So when Apple clarifies the volume of its planned orders to its suppliers reports run rampant that Apple has “cut” its production requests. In my understanding, Apple doesn’t “cut” its orders. Apple clarifies the volume of product that will be ordered. Unfortunately, these reports occur every year as Apple clarifies the volume of its product or component orders following the peak demand period.

      Apple often contracts for custom product and will pay above commodity-grade prices for the custom or specially designed product. It’s in the supplier’s financial interest to make Apple’s product orders a priority. Apple’s volume orders fuel the supplier’s ability to innovate and invest in product development.

      In the article referenced, the analyst seems to say two contradictory things. The analyst first says Apple suppliers are at risk after the holiday season from “weak” demand and then says Apple’s supply orders have been conservative and thus the risk is diminished. So which is it?

      On your point the June quarter and September quarters might best be viewed as a seamless 6-month period, I also agree. I would say the same about the December and March quarters as well.

      As PED mentioned, the note best applies to supply orders from the other smartphone maker mentioned and has little to no applicability to Apple.

      1
      October 26, 2018

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