After Apple's (NASDAQ: AAPL) bombshell decision to drop Imagination Technologies, an announcement that utterly decimated shares of the British company, Apple's suppliers should all be re-evaluating their relationship with the Mac maker right now and assessing what kinds of risks they face. Imagination's situation was exacerbated by the fact that it derived fully half of all its revenue from Apple, so the loss of that business will wreak financial havoc on Imagination as Apple shifts to in-sourcing its graphics architecture development over the next two years.
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Apple's Mac GPU suppliers should also be concerned in theory, but any threat they face would be many years away, if at all. In the near term, Apple has quite a few semiconductor suppliers on the mobile side that run the risk of getting ditched next.
Synaptics (NASDAQ: SYNA) has a reasonably high chance of getting cut next, according to Pacific Crest analyst John Vinh (via Tech Trader Daily). Synaptics, which specializes mostly in touch-screen microcontrollers but has recently been diversifying into biometrics and display drivers, had a relationship with Apple back in the iPod days (think of the iconic clickwheel), but that relationship came to an end long ago. The company bought its way back into Apple's supply chain with the $475 million acquisition of Renesas SP Drivers in 2014 (Apple had reportedly considered acquiring Renesas at the time).
The analyst warns that the display driver chip that Synaptics currently supplies to Apple could be worth bringing in-house. In-sourcing display driver chips would give Apple more control over power and performance while also reducing dependence on Samsung for OLED displays. Apple has hired former Renesas engineers, so it's quite possible that Apple is already working on an internally developed version. Vinh considers the risk of Apple pursuing this route as "moderate to high." Also named as another possible at-risk supplier is Dialog Semiconductor.
Image source: Apple.
In terms of quantifying this risk, Synaptics has five unnamed customers that represented 10% or more of revenue last quarter, ranging from 10% to 21%, according to its most recent 10-Q. The worst-case scenario would be that Apple is that 21% customer and plans on dropping Synaptics soon, but Synaptics has a larger relationship with Samsung, so the 21% customer is probably the South Korean company. Regardless, the exposure is nowhere near the dangerously high 50% exposure that Imagination had.
Vinh assigns a "low to medium" risk that Apple drops audio codec supplier Cirrus Logic (NASDAQ: CRUS), which has ridden Apple's coattails for years. In-sourcing the audio codec would be quite feasible from a technical perspective, but the analyst does not believe that Apple would realize much in the way of benefits by doing so, either in costs or performance. Cirrus Logic also invests heavily in research and development, roughly $200 million per year, and it would be extremely expensive for Apple to in-source to a level that could yield differentiated features. That being said, the risk is still rather large, as Apple represented a whopping 85% of revenue last quarter, according to Cirrus' most recent 10-Q.
The broader trend is that Apple's chip ambitions seem to have no bounds, particularly for anything it deems a "fundamental" technology. Apple will always have a broad supplier base, but wherever it sees strategic value (differentiation, costs, roadmap control, etc.) in in-sourcing, investors should expect Apple to slowly but surely cut out suppliers whenever it can.
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