September very well could be the most important month of the year for technology giant Apple (NASDAQ:AAPL). In the coming weeks -- I'm betting September 8 -- Apple will almost assuredly unveil its next-generation smartphone – the iPhone 6s.
As the successor to the new, larger-screened design of the iPhone 6 and 6 Plus, the iPhone 6s will likely utilize the same form factor. Apple will likely include at least one new flagship feature to differentiate this year's iPhone from the last, and if reports prove correct, Apple's business could create meaningful benefits and challenges for the company behind this year's marquee feature.
Apple to boost Analog Devices
During the past few months, rumors abounded that Apple plans to make its Force Touch technology the flagship feature in this year's lineup of iPhones and iPads, and one company stands to benefit more than any other from Apple's product decision -- Analog Devices (NASDAQ:ADI). For those unfamiliar with it, Analog Devices supplies the touchscreen controller that powers Apple's Force Touch in the Apple Watch.
Early Watch shipments have proven impressive, but given their limited volumes on an absolute scale, the Watch alone lacks the punch to drive substantial growth at Analog Devices. However, the possibility of placing potentially hundreds of millions of its touchscreen controllers into this year's iPhones, iPads, and even Macs could provide a meaningful lift to Analog Device's relatively small sales base.
In its recent earnings report, Analog Device's guidance came in well above what analysts expected, helping further solidify analysts' confidence that the company's status as Apple component supplier du jour will help lift its business. In fact, one sell-side analyst believes Force Touch component shipments will add as much as half a billion dollars in fresh sales to Analog Devices' coming fiscal year.
This prediction assumes Force Touch only appears in the iPhone 6s and the iPad Pro, so the actual financial impact could swing in either direction depending on the actual number of Apple products that receive Force Touch functionality this year. And as exciting as that sounds for a company with a sales base of $3.2 billion over the last 12 months, the history of Apple's component suppliers is littered with cautionary tales, as well.
A dangerous dance
With its vast financial resources and truly massive shipment volumes, winning Apple's business presents a mouth-watering growth opportunity for executives at component specialists like Analog Devices. However Apple has a well-documented history of leveraging its huge footprint to secure the best pricing possible and, when possible, to thwart its competitors from pushing copycat features into their devices, as well.
While such arrangements typically benefit Apple in a number of ways, Apple's stringent supplier deals also tend to create supplier arrangements that can border on one-sided and damage a company's long-term business model.
Placement wins in Apple devices drove significant top-line growth for companies like OmniVision Technology and Cirrus Logic. Apple accounts for the majority of Cirrus Logic's business, so any perceived change in its arrangements with Cupertino can incite panic among its investors. For example, Cirrus Logic shares promptly cratered -14% in a single day in 2013 on news that Apple had cut the audio amplifier's chips out of its iPad 4. Worse yet, OmniVision Technology shares plummeted more than 50% in 2011, the year when Apple began dual-sourcing the image sourcing chips between OmniVision and Sony. Worst of all, the onerous terms Apple placed on its would-be sapphire supplier, the now defunct GT Advanced Technologies, at least contributed to its decision to file for bankruptcy late last year.
Like I said at the open, landing a component supplier position in any Apple product can drive tremendous growth, but history is replete with examples of the fickle treatment Apple can offer those same companies. So as exciting as this new development might prove for Analog Device's shareholders, investors in the touchscreen controller supplier must also understand that doing business with Apple can bring with it its own unique set of risks.