A $2 Billion iPhone Splurge That Didn’t Go So Well

(Bloomberg Opinion) -- The travails of Austria’s AMS AG are a cautionary tale for suppliers gambling on next-generation smartphones.

The maker of laser sensors spent more than $2 billion over three years buying companies and expanding production capacity to ensure that its technology dominated the 3-D scanners in the newest smartphones. Apple Inc.’s iPhone X series uses much of AMS’s product line.

Unfortunately for AMS, the push coincided with the slowing of global smartphone sales. Its market capitalization is now less than $2 billion, putting that spending splurge in question. The iPhone X and its offspring are anything but a hit. At the start of the year, Apple cut its revenue outlook for the first time in almost two decades as demand for iPhones weakened, and the drop-off of Chinese sales was more extreme than expected.

A $2 Billion iPhone Splurge That Didn’t Go So Well

AMS, which had already cut its expectations for the Christmas quarter just gone, on Tuesday suspended its cash dividend and said it would stop giving full-year earnings guidance. That shows a distinct lack of confidence in the recovery of the smartphone market.

The chipmaker is more exposed to Apple’s vicissitudes than most. It gets about 20 percent of its revenue from the tech giant, according to Bloomberg supply chain analysis, but it would probably have hoped for even more given the scale of its investment. The 80 percent decline in AMS shares since their March peak makes it the worst-performing Apple supplier of the past 12 months.

A $2 Billion iPhone Splurge That Didn’t Go So Well

Chief Executive Officer Alexander Everke is now retrenching. He’s slowing capital spending, which jumped more than sevenfold between 2015 and 2017. He’s also stopped plans for a secondary listing in Hong Kong, a move that had been intended to raise fresh capital to fund expansion.

Everke said his company’s manufacturing facilities are working well below capacity, underscoring the sense that AMS overinvested in factories. New investment is the last thing it needs. The CEO admitted as much in a conference call with analysts. Henceforth, he plans to lean more heavily on contract manufacturers.

As suppliers look toward the next round of smartphone innovations, they would do well to learn from AMS’s bitter experience. The global smartphone market is saturated, and the likelihood of sales regaining 2016 levels seems slim. So a company seeking to position itself to supply components for smartphones with foldable screens, for instance, should be far more circumspect than AMS.

The Austrian company’s sales have more than tripled since 2015, when it started the 3-D sensor spending spree, but the shares trade below the levels of four years ago. While some analysts think its investment will ultimately come good, AMS’s rocky patch is far from over. Investors need to get used to rewarding prudence among the smartphone suppliers.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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