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How Far Will Apple Inc. Dig the Dagger Into Dialog Semiconductor?

A report that surfaced yesterday suggesting Apple Inc. (NASDAQ:AAPL) will move to designing iPhone power management chips in-house is already causing ripples through the industry. Android competitors are facing the prospect of yet another custom Apple chip that will give the iPhone an advantage.

How Far Will Apple Inc. Dig the Dagger Into Dialog Semiconductor?

Source: Apple

This is also a slap to the face of yet another AAPL supplier, as its relationship to the smartphone giant is likely coming to a close. Dialog Semiconductor PLC Ordinary Shares (OTCMKTS:DLGNF) is the current supplier of the iPhone chips, and its shares tanked on the news.

Apple Will Design Custom iPhone Power Management Chips?

Japan’s Nikkei Asian Review published a report yesterday that claims Apple is dumping U.K.-based Dialog Semiconductor as the supplier of iPhone power management chips. Instead, Nikkei says Apple will move to an in-house design for the iPhone chips, “the most advanced in the industry.” Shares of Dialog — which relied on Apple for 74% of its revenue in 2016 — dropped by as much as 19% when the report was released.

Citing unnamed sources, Nikkei says Apple could replace half the iPhone power management chips with its own design in 2018, although another source says it may be 2019 before the company is ready to start making the transition. Once the process has started, expect all iPhones and iPads to switch to the custom Apple chips.

Where There’s Smoke, There’s Fire

One report that Apple is planning a switch is far from a certainty. However, Reuters published a story back in April suggesting that the company was going to ditch Dialog Semiconductor in favor of its own custom designed iPhone power management chips.

That April report resulted in Dialog shedding 36% of its value.

AAPL’s History of Going In-House With iPhone Chips

Adding to the likelihood that the rumors of Apple moving to its own iPhone power management chips are true, is the company’s established pattern of ditching suppliers in favor of its own design. The risk of supplying a key component for the product that has driven AAPL stock for the past decade was demonstrated earlier this year by Imagination Technologies (OTCMKTS:IGNMF).

The British company was the long-time supplier of iPhone graphics chips. When news hit that Apple was going to design its own iPhone graphics chips, Imagination Technologies stock plummeted over 68% in a matter of hours.

Winners and Losers

If the Nikkei report is correct and Apple moves to an in-house chip design, Dialog Semiconductor is obviously the loser. Having 74% of its business evaporate over the next year or two is going to be difficult to recover from.

Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) actually manufactures those Dialog chips and Nikkei’s sources say it will switch to making the Apple-designed iPhone power management chips. So the move is a wash for TSMC. Apple’s Android competition is likely to find itself facing iPhones that have an edge in battery life, charging and/or performance, at least for a few years.

The big winner is going to be Apple, of course, which is good news for AAPL stock. Each time the company has replaced an off-the-shelf iPhone component with one of its own design, it saves money by cutting out another third-party supplier. That helps preserve those industry-leading smartphone profit margins.

More importantly, each custom-designed chip lets Apple even more tightly integrate software and hardware. That means superior performance and features the competition can’t match, keeping the iPhone on top and continuing to drive AAPL stock.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/12/how-far-will-apple-inc-dig-the-dagger-into-dialog-semiconductor/.

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