Short-Sellers Circle Apple Supplier That's Loved by Analysts
(Bloomberg) -- 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.
Austrian sensor maker AMS AG has fallen more than 40 percent from its all-time peak in March amid concerns over the smartphone supply chain and shorters are betting on more downside. Short interest in AMS climbed above 20 percent of the free float this week, according to data from S3 Partners. Meanwhile, the sell-side consensus rates it as among the best buys in the region, boosted by a technological edge in sensors used in Apple Inc.’s iPhone X.
No analysts among the 18 surveyed by Bloomberg recommend selling AMS, and 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 first-mover 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 $500 million, 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 in August. 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.
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 PMI, 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 third quarter 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.”
Shorts vs Sell-Side
AMS gets about 20 percent 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 exceeding 20 percent compare with 6.6 percent short interest when the stock traded at a record 120 Swiss francs earlier this year. AMS fell 1.3 percent to 67.24 francs as of 12:35 p.m CET Wednesday. The stock 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. “AMS is one of the best positioned suppliers to benefit from increased adoption of 3D sensing solutions across smartphones and beyond.”
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