Short-sellers circle European Apple supplier

By BLOOMBERG

LONDON • One of last year’s top-performing European stocks has lost nearly half of its value in the past five months, yet short-sellers keep flocking to it.

Sell-side analysts said it remains one of the best buys in the region, boosted by a technological edge for sensors used in Apple Inc’s iPhone X.

Austrian sensor maker AMS AG has fallen more than 40% from its alltime peak in March and shorters are betting on more downside.

Short interest in AMS climbed above 20% of free float this week, according to data from S3 Partners.

Meanwhile, no analysts among the 18 surveyed by Bloomberg recommend selling the stock.

On the contrary, its consensus rating is the eighth-highest among the 600 companies making up the Stoxx 600 Index, better than any semiconductor peers in the benchmark.

The positive view is evident in lofty growth expectations, at least partly explained by the company’s firstmover advantage in 3D sensing components, used in applications such as the iPhone X’s facial recognition.

The company’s net income is expected to more than double next year to nearly US$500 million (RM2.06 billion), according to a Bloomberg survey of 13 analysts.

Apple’s push into augmented reality has made AMS a crucial supplier for the optical components it needs to differentiate its flagship phone from competitors’ offerings. The big question for AMS investors is how long their advantage in that technology will last.

“With new technology, you can charge a customer like Apple a higher price, because you’re the only supplier,” Neil Campling, an analyst at Mirabaud, said in a phone interview.

“That’s where the big disconnect between the bulls and bears at the moment is, will they deliver that operating leverage and profit, will they remain a sole source.”

Other chipmakers have also hit a rough patch in the markets lately, with the industry benchmark Philadelphia Semiconductor Index underperforming the broader market, as well as tech stocks this month.

Morgan Stanley cut its sector recommendation to ‘Cautious’ earlier this month, saying that cyclical indicators are “flashing red”. Disappointing earnings signals from Microchip Technology Inc and Applied Materials Inc in the past weeks have done little to inspire confidence.

AAC Technologies Holdings Inc, a supplier of acoustic components to smartphone brands, slid in Hong Kong yesterday after second-quarter (2Q) revenue and profit missed estimates.

Mirabaud turned more cautious on the sector earlier this year after noticing “warning signs” such as rising inventory levels, trade-war concerns and declines in some leading economic data, including the German manufacturing Purchasing Managers’ Index, according to Campling.

“Multiples have expanded quite aggressively for the sector, which signifies that investors are expecting to see significant operating leverage in the business models,” Campling said, noting that a previous growth boost from smartphone sales may have set earnings expectations too high.

“We’re now in a new phase of semiconductor cycle for smartphones, and that particular cycle is low-volume growth.”

Increased uncertainty is also evident in the recent decision by Northern Trust Capital Markets, which closed its ‘Buy’ rating on AMS in July, unimpressed by earnings and the company’s forecasts for revenue to almost double in the 3Q from the previous one.

“The commitment to 2019 revenue targets being reached organically was distinctly lacking,” Northern Trust’s Paul Moran wrote in a note after the results. “There is a lot of opportunity for AMS, but it is not clear how well it will execute against existing targets.”

AMS gets about 20% of its revenue from Apple, according to supply chain data compiled by Bloomberg.

This makes it less dependent on the California giant than power-chip supplier Dialog Semiconductor plc, which trades at significantly lower multiples due to a smaller degree of client diversification.

Short bets on AMS have risen strongly in the past month, even as the shares trade near a one-year low.

Current shorts above 20% compare to a 6.6% short interest when the stock traded at a record of 120 Swiss francs (RM501.27) earlier this year, versus 68.16 francs on Tuesday.

AMS shares more than tripled in 2017, posting the second-best performance on the regional benchmark. The company declined to comment on the matter.

Most of the sell-side analysts are standing pat. Barclays reiterated its buying conviction last week, noting that AMS shares have struggled due to a weak first half for lead customer Apple, a delay in reaching profit margin targets and concerns around revenue visibility.

“We continue to think the iPhone X is the very beginning of 3D sensing, with many other smartphones and many other verticals to drive adoption over the coming years,” Barclays analyst Andrew Gardiner said in the report, keeping his recommendation at ‘Overweight’.