According to Barron's, Citigroup analyst Chris Danely said chipmaker Analog Devices (ADI 0.70%) has "likely won a slot in Apple's (AAPL 3.54%) next iPhone." This win could positively impact Analog Devices' revenue and profit in 2016, according to the report.
Let's take a closer look at what Danely had to say.
What's this design win worth?
Danely said this win could be worth $160 million in revenue to Analog Devices in 2016, adding about 4% to the company's expected top line for the year. The analyst estimated the deal's operating margin at 23.5%, lower than the 32.4% company-wide operating profit margin he expects for the full year.
To explain his relatively low margin expectation for the deal, Danely said margins from "high volume consumer products and large customers such as Apple" are generally lower than "high-performance analog products for industrial applications."
At any rate, the deal is still expected to be accretive to both revenue and earnings. Concordant with that view, Danely raised his 2016 earnings-per-share estimate for Analog by about 2.7%, from $2.98 to $3.06.
A "low-quality" win?
Danely noted that although the iPhone win should "boost revenue and [earnings per share] in a meaningful and material way" for Analog, that Citi has "a lot of concern on the long-term quality" of this new revenue.
"Apple is notorious for giving and taking away large design wins," Danely wrote in his research note. He added that Analog Devices has previously had "large design wins" with Apple that "ended abruptly." Those design-outs eventually led to "downside to Consensus estimates and the stock selling off," he noted.
This isn't the first time we've heard of this win, though
Analog Devices is up "just" 1.44% following the publication of this research note as of this writing. The Nasdaq index is up 1.35% and the iShares PHLX Semiconductor ETF is up 1.5%, meaning Analog Devices shares aren't outperforming the relevant indices due to this news.
This is likely because the Apple win for future iPhones -- and possibly also iPads -- was already reported by analysts at Barclays (via MarketWatch) back in March. Analog Devices shares rallied by about 10% following that initial report.
Additionally, at that time the Barclays analyst claimed that the wins at Apple for "high accuracy" analog-to-digital converters inside next-generation iPhones and iPads to enable Force Touch would add "at least" $0.80 to the company's 2016 earnings per share.
It's not surprising, then, that a separate confirmation of news that is already "known" wouldn't move the stock much, if at all.
Investment takeaway
It seems as though Analog Devices has won a spot inside the next-generation iPhone. I'd argue that winning this spot is good, although the company will have to continue to deliver best-in-class products at a price Apple is willing to pay in order to avoid losing the spot in future iPhone and iPads.
That being said, almost every chip supplier is "vulnerable" to second sourcing and/or potential design win losses. Although Danely might be right to be cautious in light of Apple's history of swapping out suppliers, I'd say this situation is almost par for the course for component vendors.
The key lesson for investors is to try to pick component vendors that offer technologies with high switching costs and a track record of delivering competitive products.
