EUR 850.00 For Business Accounts Only

Morningstar | Lowering AMS’ FVE to CHF 65 as Apple Suppliers Struggle with iPhone Unit Outlook

On Nov. 12, Apple supplier and AMS competitor Lumentum announced updated guidance for significantly lower levels of revenue and profits in the firm’s upcoming quarter because of a material reduction in 3D sensing unit sales from one of the firm’s largest customers, Apple. This announcement followed lower guidance from another supplier, Skyworks, as well as reports in Asia detailing weak demand for Apple’s new budget 3D-sense smartphone, iPhone XR. Despite AMS remaining silent on these headlines, with no suggestion as of yet that the firm is updating fourth-quarter guidance or its 2019 growth targets, we are reducing our fair value estimate to CHF 65 per share from CHF 76 to reflect our growing concern regarding smartphone demand. However, AMS’ product suite of illumination, sensor, optical path and, increasingly, software, remains competitive in the 3D sensing space. While we would reiterate our very high uncertainty rating we would also reiterate that the firm’s breadth of 3D sensing solutions should allow the company to benefit from this secular growth trend.

As we have noted several times, AMS AG is currently extremely dependent on Apple for its success and while every rumor regarding iPhone demand and consumer interest is likely to create turbulence for AMS’ stock price, we believe these rumors--among Lumentum, Skyworks, and Qorvo--are sufficiently corroborated to warrant a lower near-term outlook. Along with these announcements, other events have affected our forecast. VCSEL manufacturer, II-VI, announced plans to acquire Apple supplier, Finisar, giving the consolidated entity greater scale to compete in the 3D sensing market. Apple aside, shortly after AMS' previous quarterly results, STMicroelectronics announced that it would be supplying a Time-of-Flight sensor into an upcoming flagship smartphone product as well as ambitions to produce more structured light content.

We believe this is indicative of two things. First, that STMicro sees the growth opportunity in 3D sensing and is expanding its reach to address several price points and power requirements in consumer applications. Next, that AMS is likely to face increased competition in successfully leveraging its 3D sensing products into the automotive and industrial markets due to STMicro’s considerable strength in those markets as the largest European semiconductor company.

We want to reiterate our outlook that 3D sensing technology is here to stay and that the applications--among smartphone biometrics, consumer AR, automotive security and driving assistance, and factory automation--are significant growth opportunities for AMS. However, our previous forecasts suggested that the firm would be able to quickly capitalize on its Apple relationship to springboard to other consumer products, smartphone manufacturers, and industrial markets. We believe STMicro's announcement and consolidation in the VCSEL market suggest that path may have become much more difficult. We expect AMS to provide updates to its outlook at an upcoming technology conference at the end of November.