Apple's Weak Supply Chain Is Hurting This Semiconductor

• Apple Inc. AAPL shares are down 13 percent in the last six months, while shares of Dialog Semiconductor DLGNF are down 35 percent over the same period.
• JP Morgan’s Narci Chang maintained a cautious view on Apple’s supply chain and a Neutral rating on Dialog Semiconductor.
• Reduced sales guidance by Dialog Semiconductor due to weak demand in the mobile segment confirms the decline in iPhone momentum in 1Q16, Chang stated.

Dialog Semiconductor reduced its 4Q sales guidance by 11 percent to $395 million, from $445 million due to lower volume demand in its Mobile System segment. Analyst Narci Chang believes the weakness was mainly from Apple [Rated: Overweight], which accounts for nearly 80 percent of Dialog Semiconductor’s revenues.

Dialog Semiconductor’s revised sales guidance for 4Q15 is short of the consensus estimates and indicates a 9 percent y/y decline. Chang mentioned, “As Dialog has over one month’s lead time vs. the assembly level, we believe its 4Q guidance cut echoes our cautious view on the Apple supply chain in Asia in1Q16.”

JP Morgan analysts had mentioned in a recent note that iPhone 6S/6S+ production peaked out last year. Several Apple supply chain names had witnessed significant m/m downtrends in November, with the exception of a few companies that had gained market share and benefited from iPad Pro.

Chang expects to see meaningful share price corrections for Apply supply chain companies in 1Q16, given lowered Street expectations and disappointing Apple sell-through numbers.

Chang recommends investment in market share gainers in the Apple supply chain, like Catcher Technology Co., Ltd (TPE: 2474) [Rated: Overweight], Taiwan Semiconductor Mfg. Co. Ltd. (ADR) TSM [Rated: Overweight] and Radiant [Rated: Overweight].