Apple (AAPL) heads into the holidays hoping against hope that adult-age kids will want an iPhone under the Christmas tree at year end. The signs don't look good.
Investors can use slack iPhone sales in the third quarter to their advantage by selling short or avoiding Apple suppliers in Asia. The shares of companies feeding the Apple supply chain have sold off even worse than the company itself, on average doing 22% worse than Apple so far this year.
Apple shares peaked in October, before it became clear the new iPhones weren't selling as well as hoped. It rapidly gave back all of this year's gains, and after a 29% slide in the last 10 weeks during the broad tech selloff, now stands down 2.2% on the year.
Shares of Apple suppliers are approaching a 30% slide since the start of 2018. They shared none of Apple's mid-year optimism and have been on the slide virtually the entire 12 months. They have underperformed the broader -- and disappointing -- Asian tech sector by 3%, too.
"We see no respite for Apple suppliers in the near term, as investors are likely to continue to focus on the weakening outlook for the tech hardware sector, overlooking the low valuations," SG's head of Asia equity strategy, Frank Benzimra, and his team noted in a report this week on the Apple supply chain.
The biggest Apple supplier in the basket, at $188 billion in market cap, is Taiwanese chipmaker Taiwan Semiconductor Manufacturing Corp, better known as TSMC (TSM) . Its shares have mapped Apple's, peaking in October, but have fared worse, and are down 7.9% in 2018.
Other Asian chipmakers to put on the short-sale watch are SK Hynix (HXSCL) , which is off 18.7% this year, ASE Technology Holding (ASX) , down 37% in 2018, and Radiant Opto-Electronics (TW:6176), which is virtually alone in buoying the basket with an 18.1% gain since January 1.
Radiant is getting a boost because it isn't all about phones. Its backlights go into iPhones, yes, but the company is also the exclusive backlight supplier for iPads and MacBooks, which continue to see strong sales. Radiant beat expectations in Q3, and thanks to its broader range of products, is not being punished as much as its peers, despite the fact that Apple is by far its biggest customer.
Perhaps the best-known of Apple's suppliers is Hon Hai Precision Industry (TW:2317), which everyone knows as Foxconn. It's had a shocker of a year, with the shares down 38.4%.
Foxconn is a part of the complex lover's feud between Apple and Qualcomm (QCOM) . Foxconn is one of the contract manufacturers seeking $9 billion in damages from Qualcomm, and the group's lead attorney said on Sunday that talks of a peace pact are off the mark, with the case "gearing up and heading toward the trial" in April.
Qualcomm won a very surprising court decision in China against Apple that would ban Apple from selling all but its newest iPhones in China. Apple recently stopped using Qualcomm chips and switched to Intel (INTC) instead.
Companies like Foxconn have been buying chips from Qualcomm, then making Apple's phones, as well as paying royalties on the technology to Qualcomm. After Qualcomm sued Foxconn, Pegatron (TW:4938) (down 28.8% this year), Wistron Corp. (TW:3231) (down 17.9% this year) and Compal Electronics (TW:6674) (down 17.8% in 2018) for stopping royalty payments, the group countersued, saying the practice of selling chips, then demanding royalties -- in the form of a cut of the selling price of a phone -- amounted to an anti-competitive trade practice.
A court in Fuzhou last week handed Qualcomm a preliminary injunction banning the importation and sale of iPhones from 6S through the X. In response, Apple has filed a request for reconsideration of the verdict, and continues to sell its phones in China -- to Qualcomm's great vexation.
The court found Apple violated two Qualcomm patents on resizing photos and handling apps on a touch screen. Apple is this week scrambling to roll out software updates to its phones in China with new, non-Qualcomm tech for managing photos and apps.
One point Apple has made in its reconsideration request is that its Chinese suppliers would be hurt the most by any sales ban, as well as Chinese consumers.
Other large, and largely Chinese, suppliers to Apple include Hong Kong-listed AAC Technologies Holdings (HK:2018), Largan Precision (TW:3008) and Catcher Technology (TW:2474).
Apple is right -- those companies will bear the brunt of the pain from a ban. And as of now, they are also at the front of the suppliers bearing the brunt of Apple's lack of Santa magic with its phones.