Deceleration in the smartphone market isn't going anywhere, to the detriment of some of Apple Inc.'s (AAPL) major suppliers, according to one team of analysts on the Street who has become more bearish on semiconductor plays such as Skyworks Solutions Inc. (SWKS) and Taiwan Semiconductor (TSM). (See also: 2018 Will Be Mixed for Chipmakers: Morgan Stanley.)
On Tuesday, Morgan Stanley analysts Craig Hettenbach, Joseph Moore and Katy Huberty, along with colleagues in Asia, wrote a research note highlighting risks facing Apple suppliers amid a weakening iPhone market. In February, the smartphone maker reported lower-than-expected December-quarter iPhone unit sales. Following the results, Moore issued a note indicating that "disappointing iPhone units combined with an inventory overbuild should continue to have a pronounced impact on Apple suppliers and the smartphone segment more broadly."
Chinese Shipments Sink in Q4, First Decline on Record
The analysts wrote that unit shipments of smartphones in the fourth quarter declined 6% overall, including a 13% dip in the key Chinese market and marking the first drop off in the region on record.
"After a round of order cuts beginning in late 4Q'17, the China smartphone supply chain has been undergoing inventory digestion and so far we haven’t seen any major uptick post Chinese New Year," wrote the Morgan Stanley analysts. They added that new devices from Chinese smartphone companies including Huawei and Oppo don't look significant enough to reverse current chip trends. As for Apple, slowing demand for the 10th anniversary iPhone X spells bad news for chipmakers, including an inventory glut due to pre-orders from December.
Morgan Stanley rates Skyworks at underweight, indicating that the Woburn, Massachusetts-based company faces a "high bar for the June quarter." Taiwan Semi, on the other hand, may see negative headwinds for its processors partially reversed by a spike in demand for its parts from cryptocurrency miners. The investment firm recommends buying Taiwanese MediaTek Inc. (MDTKF), which competes against Qualcomm Inc. (QCOM) in smartphone processors and baseband parts. QCOM stock is down 4.3% on Tuesday afternoon at $60.11 after President Donald Trump blocked rival Broadcom Ltd.'s (AVGO) $117 billion hostile takeover bid on national security concerns. (See also: Intel May Buy Broadcom to Protect Apple Franchise.)