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Morningstar | AMS Confirms Weak 4Q Demand and Cuts Midterm Growth and Profit Targets; Maintaining CHF 65 FVE

AMS has confirmed that it is cutting its outlook for fourth-quarter revenue and profitability because of weakening demand from a “major customer,” which we believe is Apple. We anticipated that AMS would reduce its guidance after similar announcements from other iPhone suppliers, such as Lumentum and Qorvo. AMS lowered its 2018 revenue target by 15%, a less-severe cut than our recent estimate of nearly 20%. Management’s outlook for low- to midteens adjusted operating margins for the fourth quarter are roughly in line with our updated view. We will maintain our fair value estimate of CHF 65 because the updated guidance does not shift our long-term view that AMS has a strong portfolio for 3D sensing and is likely to benefit from the secular trends driving its growth.

AMS also said that it no longer expects 60% compound annual growth between 2016 and 2019, though the firm reiterated its belief that it would have double-digit revenue growth for the coming years, albeit with more volatility. We are happy to see management stop forecasting growth that, after the previous earnings call, we have considered unrealistic. We maintain our revenue estimates, published on Nov. 14, of 15% average revenue growth from 2019 to 2022. Management reiterated its 30% long-term adjusted operating margin target, but we still view this goal as a bit too aggressive and model AMS reaching the mid-20% range by 2022. In our view, AMS remains a no-moat company, with no evidence of one emerging. Without a source of competitive advantage, the firm is likely to be buffeted by shifting consumer tastes, increasing competition, and the demands of major customers like Apple.