Dialog Semiconductor tanks over fears Apple could make own chips

Shares in Apple supplier Dialog Semiconductor tanked on Tuesday after German private bank Bankhaus Lampe cut its rating on the stock due to the risk that the US company could start making its own microchips, although other analysts said these risks were being overdone.

Dialog noted the drop in its share price and said in a statement that it "knows of no business reason for this movement and confirms that it remains comfortable with its guidance for the first quarter and in its prospects for the year".

"The company notes that the level of visibility into the design cycle of its leading customers remains unchanged and the business relationships are in line with the normal course of business."

Bankhaus Lampe cut its rating on the stock to 'sell' from 'hold' and said there is strong evidence that Apple - from which Dialog derives more than 70% of its revenues - is developing its own power management integrated circuits and intends to replace the chip made by Dialog at least in part.

It said this could hit Dialog’s numbers from 2019 onwards, hence the downgrade.

"We have been observing much stronger interest in engineers of analogue and power management chips from Apple in its hiring activities for a little over a year. We believe that Apple is setting up power management design centres in Munich and California.

"We hear from the industry that about 80 engineers at Apple are already working on a PMIC with specific plans to employ it in the iPhone by as early as 2019."

Bankhaus noted there are currently 16 different job openings on the Apple website for analogue/power management engineers for the design centre in Munich alone. In addition, a search on social networks such as LinkedIn revealed that Apple has already poached about 20 chip designers, some of them with long-standing experience from Dialog.

The bank said that whether these plans will be successful or not remains uncertain but either way, Dialog is facing "significant uncertainty".

Last week, shares in London-listed chip designer Imagination Technologies tumbled after tech giant Apple said it would stop using its graphics technology for new products.

RBC Capital Markets provided its thoughts on the recent pullback in Dialog's shares, saying the design-out risk was overdone and that it would be buying the current dip in the stock.

RBC analysts pointed out that the company has around 18 to 24 months of visibility, as it's in the process of designing the September 2018 iPhone iteration. In addition, it said the recent reports of 80 design engineers at Apple versus 1,300 at Dialog represent a material gap.

They suggested US investors will buy this dip on the open given the previous trading dynamics when Imagination Technologies caused Dialog to temporarily trade down before recovering.

"Finally, we would not be surprised if Dialog comments on its design visibility on this quarter's conference call making the set-up materially more attractive at these levels."

Barclays also sounded a much more upbeat note on Dialog. It said in a note that while news of Imagination’s removal from the Apple supply chain illustrates the dangers of being heavily geared towards one of the world’s largest smartphone makers, Dialog is in a unique position given the level of customisation it conducts on behalf of its largest customer.

"The combination of upcoming content gains and ongoing diversification leaves us confident that Dialog will be able to deliver double-digit gains in revenue and earnings in 2017/18, with the visibility provided by management on the move to a multi-chip architecture providing support to such claims. The next key catalyst to the shares in our view is whether management will be in a position at the 1Q17 results on 9 May to comment on the nature of the 2018 content gains."

At 1410 BST, Dialog shares were down 16% to €39.99.