First-half results from Imagination Technologies (IMG) and a trading update from IQE (IQE) both highlighted tepid trading in mobile, microchip and smartphone markets in recent months. The weaker backdrop was one reason why investors sent shares in the microchip designer down sharply. Although IQE, which supplies advanced semiconductor components called wafers, managed to offset those pressures with strong sales of photonics, technology licensing and other non-wireless offerings, a poorer backdrop would be a headache for many companies.
A prime example is Apple (US: AAPL), which earns the majority of its profits from iPhone sales. Several analysts have recently predicted that the consumer electronics titan's smartphone sales will fall in 2016 - they have risen every year since the iPhone's launch in 2007. A key reason for concern is that Dialog Semiconductor (Ger: DLGX), which earns around three-quarters of its sales by supplying microchips to Apple, recently slashed fourth-quarter revenue guidance from up to $460m (£306m) to as low as $390m. Its downgraded forecast suggests Apple is reducing its orders, perhaps in response to falling demand for iPhones.
Indeed, Morgan Stanley predicts iPhone sales will fall about 6 per cent this financial year. The broker blames higher prices in international markets and rising smartphone penetration in developed markets, which have depressed upgrades and new user growth. Similarly, analysts at Credit Suisse have lowered their predicted iPhone sales for 2016, citing reduced production in Asia, which could indicate tepid demand for the iPhone 6s. Their research note also predicts that, for the first time ever, the net number of new smartphone customers could fall this year. The reason is near-universal ownership of smartphones among potential buyers - there are an estimated 3.3bn smartphone users worldwide. If Apple does falter, a raft of suppliers including Imagination, IQE and ARM (ARM) would suffer.
Running out of new customers might explain why Apple recently rolled out an upgrade plan that charges consumers a monthly fee for the latest iPhone, an annual upgrade and damage insurance. Management has also trumpeted the growing number of people switching to iPhones from rival Android phones. As the number of new users dries up, enticing iPhone owners to upgrade and Android users to switch will become a top priority. On the other hand, Apple is opening more than a dozen stores in smaller Chinese cities this financial year to reach untapped populations. And broker Piper Jaffray argues that the key growth catalyst for Apple will be the launch of the iPhone 7 next year, which could spark a new cycle of purchases, switches and upgrades.
