By Alistair Smout
LONDON (Reuters) - Apple's main suppliers rallied on Wednesday in sympathy with the tech giant's forecast-beating results, but that's only half of the story as shares in companies like Dialog, Manz and AMS stay sharply down this week on their challenging outlook.
Dialog, Manz and AMS shares rose 3 to 6 percent after Apple (O:AAPL), the world's most profitable company, painted a rosy picture for its new iPhone, beating Wall Street's sales and profit forecasts.
Despite Apple's strong show, shares in its three suppliers have been down 16-27 percent this week following a cautious outlook. Manz lowered its sales and profit forecasts, AMS AMS saw softer demand patterns in consumer and non-consumer markets and Dialog saw its gross margin largely unchanged this year.
"For Apple to maintain 40 percent margins, it has to squeeze suppliers. It recently went from three suppliers of its acoustic chips to four, suggesting the technology isn't that different and that it can use that as leverage," a tech analyst said.
"(Semi stocks) that are too heavily exposed to one company are a huge red flag. They need to diversify that risk, which is one of the reasons we prefer ARM."
ARM Holdings (L:ARM) is the British chip designer whose technology powers Apple's iPhone.
According to data from Thomson Reuters StarMine, AMS is predicted to miss market expectations for its full-year earnings by 1 percent. Dialog is also expected to be down by 2 percent and Manz is seen missing its expectations by 13 percent.
Brokers have also been quite negative on Apple's several suppliers. Deutsche Bank (DE:DBKGn) and Barclays (L:BARC) cut their target prices for AMS by about 12 percent, while Credit Suisse (VX:CSGN) lowered its target for the Dialog by 11 percent.
Analysts said that although stocks that benefited from Apple's meteoric rise might see some further upside, such squeezing of suppliers means that investors could no longer simply hop aboard and enjoy the ride. "Apple's been a fantastic story. While the law of large numbers means that iPhones and iPads may slow down, equally there are upgrade cycles that will provide visibility for some time to come," said Russ Mould, investment director at AJ Bell, adding that he also thought ARM was well placed if Apple sales did slow down. "You clearly don't want to become too dependent on one customer ... but ARM doesn't care who stays in fashion between Apple and Samsung (L:0593xq) phones, and is used in products beyond phones as well."
Shares in ARM Holdings have outperformed its peers this week by falling less than 2 percent.
ARM beat market expectations last week with a 27 percent surge in its third-quarter profit. ARM's low-power processor designs are used in nearly all smartphones. It has consistently outperformed the market as it has found new uses for its technology, such as tablets.
"ARM is enjoying accelerating growth," Neil Campling, partner at Aviate Global, said, adding that ARM's presence across several businesses, geographies and consumer markets makes its an attractive company.
"The fact is whether Samsung lose share to Huawei and Xiaomi, for example, or GM to BMW, ARM is literally at the core of all."