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Earlier this month, Pacific Crest issued a note for investors highlighting its concerns for Apple (AAPL +2.55%) suppliers as the iPhone 7 launch date approaches. Usually, Apple's high tide of iPhone sales have helped lift its suppliers up along with it, but the company's drop in iPhone sales last quarter hurt InvenSense (INVN +0.00%) and other Apple suppliers. InvenSense's revenue declined 20% year over year in part because of the iPhone sales drop.
Pacific Crest said in its investor note that the upcoming iPhone 7 concerns put estimates at risk for InvenSense and eight other suppliers. The research group was formerly bullish on iPhone 7 demand, but has since said that there will be "much more disappointing" iPhone sales in late 2016.
InvenSense's stock lost 6% after the note was released (it's since gained that back). But it's difficult to separate InvenSense's fate from the iPhone because the component maker earned about 40% of its total revenue from Apple in fiscal 2016. Most of the current projections for Apple's next device don't bode well for InvenSense, either.
InvenSense needs Apple badly
InvenSense has relied on Apple's business for years. That used to be a huge blessing but has since turned into one of InvenSense's biggest curses. InvenSense's revenue dropped 20% year over year the same quarter that iPhone sales fell.
The problem for InvenSense is that most analysts are predicting disappointing sales estimates for Apple's next device.
Ming-Chi Kuo, an analyst at KGI Securities (with a pretty reliable track record), says that worst-case scenario would put 2016 iPhone shipments at about the same level as they were in 2014. Kuo expects 190 million iPhone units sold this year, compared to 193 million units in 2014. The best-case scenario from Kuo is that Apple ships 205 million iPhones, which would still be an 11.6% drop year over year.
There are some positive estimates for iPhone shipments, of course. BMO Capital Markets analyst Tim Long believes that there's pent-up upgrade demand for iPhone users. He says there are 120 million phones that are poised for an upgrade based on past data on iPhone upgrade cycles by users.
Long says that many iPhone users upgrade their device every two years, and that this year there are more of them than usual. When the iPhone 6 launched, 23% of existing iPhone users had owned their device for two years or more, that fell to 19% when the iPhone 6s was launched, but will be at 25% when the iPhone 7 launches in the fall.
Long thinks this demand means there could be record sales for the iPhone 7. If that happens, then InvenSense's stock could bounce back a bit, but there's no guarantee. Remember that InvenSense's stock began its decline in 2014 while Apple's iPhone sales were still strong.
I woulnd't bet on this
Most of the news surrounding Apple's next iPhone is that the company is removing the headphone jack. There are other reports that the company will finally increase the base amount of internal storage as well.
We don't know anything for sure yet, but if those are indeed the biggest selling points of Apple's next device, then both companies are probably in for some rough times ahead.
InvenSense knows all too well the problems with tying its revenue sources too much to smartphone sales. In addition to its problems stemming from Apple, the company's been burned by falling Samsung smartphones sales, and has even lost some of Samsung's business.
InvenSense has tried to offset all of this with an ever-increasing focus on selling components for Internet of Things (IoT) devices. But that hasn't happened fast enough. Only 32% of the company's total revenue in Q4 came from IoT sales.
For now, it appears InvenSense's fate is still too closely aligned with the smartphone market, and Apple in particular. And, as odd as it is to say it, that's no longer a strong enough business model to bank on.
