Earlier this year, Apple (AAPL -0.60%) launched a $1 billion Advanced Manufacturing Fund for US companies. Apple revealed that fund alongside other ways it would contribute to job creation in the United States -- like its 80,000 US employees and the $50 billion it paid US suppliers in 2016 -- in response to criticisms that it made most of its products overseas.
In May, the fund awarded $200 million to glass and ceramics maker Corning (GLW 0.65%). In mid-December, it awarded $390 million to optical components maker Finisar (FNSR). Let's take a closer look at Apple's relationships with these two suppliers.
Corning has supplied its damage-resistant Gorilla Glass for Apple since its first iPhone. Speaking about that 10-year-old partnership, Apple COO Jeff Williams noted that "every customer that buys an iPhone or iPad anywhere in the world touches glass that was developed in America."
Apple also notes that the partnership has "created and sustained nearly 1,000 US jobs across Corning's R&D, manufacturing and commercial functions," and that the fund's award will "support Corning's R&D, capital equipment needs and state-of-the-art glass processing."
Over 5 billion devices worldwide use Gorilla Glass, which is widely considered the "best in breed" supplier in a market with few noteworthy rivals. Corning constantly maintains that position by upgrading its Gorilla Glass with stronger versions, like Gorilla Glass 5, and new variants like Gorilla Glass Auto for cars and Gorilla Glass SR+ for wearables.
As a result, Corning's Specialty Materials business, which produces Gorilla Glass, became its fastest growing business. Revenues at the unit rose 26% annually to $373 million last quarter, and accounted for 14% of Corning's top line. Corning's optical communications, life sciences, and environmental technologies units are also growing at healthy rates, which offset the ongoing softness of its display technologies unit, which has been weighed down by sliding LCD prices.
The strength, diversity, and flexibility of Corning's business model attracted a lot of investors, lifting the stock more than 30% over the past year. Apple's vote of confidence is another long-term catalyst for this essential supplier.
Finisar, which produces a wide range of fiber optic components, fared far worse with a near-30% drop this year. Sluggish orders from Chinese OEMs and a loss of market share at Huawei resulted in a 10% year-over-year drop in revenues last quarter. That decline disappointed investors, who expected Finisar to be a "super cycle" play on rising demand for fiber optic products.
However, Finisar also recently started shipping VCSELs (vertical-cavity surface-emitting lasers) for 3D sensing tech in mobile devices and cars, which is partly offsetting its declines in the telecom market. Apple uses Finisar's VSCELs in the iPhone X's TrueDepth camera and the AirPods' proximity-sensing capabilities.
Finisar recently acquired a new facility in Sherman, Texas, which will eventually enable it to produce VSCELs at lower prices through the use of 6" wafers. Apple claims that its award will help Finisar "exponentially increase its R&D spending and high-volume production," add "more than 500 high-skill jobs," and transform Sherman into "the high-tech VCSEL capital of the US."
Apple states that in the fourth quarter of 2017 it "will purchase 10 times more VCSEL wafers than were previously manufactured worldwide over a similar time period," and that 100% of those VSCELs will come from Finisar's Sherman plant. Therefore, as Finisar's main telco fiber business recovers and VSCEL orders accelerate, Finisar's stock might eventually rebound.
The bottom line
These two "awards" shouldn't be confused with equity investments, since Apple didn't actually buy equity stakes in either company. Instead, these awards more closely resemble prepayments on future orders.
Apple might be doing this for PR reasons in response to President Trump's criticism of the company's supply chain. The awards could also give Apple more clout against Corning and Finisar in price negotiations. Nonetheless, Corning and Finisar should still benefit from Apple's support since Apple won't stop using Corning Glass or Finisar's VSCELs anytime soon.