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Nov 12, 2018

Apple suppliers tumble on as weak iPhone demand persists

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Major suppliers to Apple Inc.’s iPhone fell Monday as investors fretted that one of the most important product lines in the technology sector was seeing weak demand.

The latest warning sign was Lumentum Holdings Inc. cutting its second-quarter outlook after one of its largest customers asked to “meaningfully reduce shipments” for previously placed orders. Lumentum didn’t name the customer, but Apple is its biggest, according to Bloomberg supply-chain data. Shares of Lumentum plummeted a record 33 per cent while Apple dropped 5 per cent. Oclaro Inc., which is being bought by Lumentum, lost 12 per cent, its biggest drop since April.

“Investors should consider Lumentum’s updated guide as reflecting as much as a 30% cut in Apple orders,” Wells Fargo analyst Aaron Rakers said in a note to clients.

Loop Capital Markets also said the customer is likely Apple. The development “is not entirely surprising” but “it seems very likely to us that the market for 3D sensing-related light sources and other components is going to be smaller next year than previously anticipated,” analyst James Kisner said in a research note.

Lumentum executives told investors at a UBS conference in San Francisco that the customer asked to cut 3-D component shipments just days ago after having requested expedited orders in recent weeks.

Lumentum makes the vertical cavity surface-emitting lasers, or VCSELs, that Apple uses for its latest iPhones that come with 3-D facial recognition. Apple didn’t immediately reply to a request for comment late Monday.

Among other Apple suppliers, Cirrus Logic Inc. sank 14 per cent, Qorvo Inc. and Broadcom Inc. each slid 6.4 per cent, ON Semiconductor Corp. fell 5.9 per cent, Skyworks Solutions Inc. fell 5 per cent, and Finisar Corp. dropped 4 per cent. Semiconductor stocks were broadly lower with the Philadelphia Semiconductor Index losing 4.4 per cent. 

Asian suppliers also tumbled after the report. South Korea’s LG Innotek Co., which gets about half its revenue from Apple, slid as much as 9.5 per cent. Japan Display Inc., which also depends on Apple and reported earnings that missed estimates, dropped 11 per cent.

Lumentum’s outlook comes a week after Nikkei reported that Apple was canceling a production boost for its iPhone XR line, and less than two weeks after Apple’s fourth-quarter results showed tepid unit sales growth. The company also said it would stop providing unit sales for iPhones, iPads, and Macs in fiscal 2019, a step Nomura Instinet said raised “the specter of a sustained iPhone downturn.”

Adding to Monday’s negative news, Longbow Research cautioned that Apple is facing weak iPhone demand in China. And Citi downgraded Skyworks to neutral and slashed its price target to US$85 from US$116, citing both “disappointing iPhone XR unit sales” and “broad smartphone weakness.” Last week, Skyworks gave a first-quarter outlook that missed expectations because of smartphone weakness, prompting at least two other downgrades.

Citi also cut its target on Qorvo on Monday due to iPhone XR weakness.