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Will the Loss of Apple's Business Doom Dialog Semiconductor?

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Shares of Apple Inc. (AAPL - Free Report) chip maker Dialog Semiconductor Plc DLG.F plummeted as much as 30% Tuesday after an analyst downgraded the stock, noting that Dialog could potentially lose its Apple contracts as early as 2019.

Karsten Iltgen, an analyst at the private German bank Bankhaus Lampe, downgraded Dialog, which makes battery-saving computer chips known as Power Management Integrated Circuits for iPhones and iPads, to a “sell” rating. Iltgen published a research note that showed the company could lose a significant portion of its critical Apple business by 2019 as the iPhone maker moves some of its computer chip production in-house.

Iltgen, who has been covering the semiconductor maker for over 15 years, helped send the stock down almost single-handedly.

The UK-headquartered Dialog trades on the Frankfurt (Germany) Stock Exchange. Dialog’s stock was down 15.71% to 40.80 euros ($43.19) per share as of noon Eastern Standard Time on Tuesday.

Iltgen also noted that Apple plans on hiring more engineers to help produce its own battery-saving chips, on top of the reported 80 new engineers the technology giant recently hired. A large portion of Dialog’s business comes from its relationship with Apple. "It could be quite alarming for the company in the medium term at least," Iltgen told CNBC this morning. “I'm describing in the note that from 2019 onwards this could have a significant impact on earnings."

The company has already issued a statement noting that it "knows of no business reason" for the movement of its share price. "The company notes the level of visibility into the design cycle of its leading customers remains unchanged and the business relationships are in line with the normal course of business."

Analysts at Morgan Stanley (MS - Free Report) and Bank of America Merrill Lynch (BAC - Free Report) aren’t as pessimistic as Iltgen. But still, Dialog sunk by as much as 36% at the start of trading, which marked the company’s largest intraday drop since 2000.

A short-term positive for Dialog, even if the reported 2019 shift proves to be true, is the fact that Apple’s highly anticipated 10th anniversary iPhone is due out in 2017. And if Apple sticks to its regular time clock, the second-generation follow-ups will likely hit the market in 2018, which gives Dialog some time to shift its plans and seek out new business.

Apple’s Potential Shift Could Have Big Impact

Dialog is one of the largest power management chips producers in the world, employing roughly 1,300 engineers to help make its battery-saving chips. According to analyst estimates, Apple accounted for more than 70% of the company’s sales in 2016.

Therefore, even a small shift in Apple’s future production needs, if the company begins to make chips in-house, could significantly impact Dialog.

Last week, British graphics chip maker Imagination Technologies’ stock dropped nearly 63% after Apple announced it would stop using the company’s products completely within two years.

Smaller suppliers can become too dependent on Apple’s massive demand. Some of Apple’s biggest clients can get bogged down and even sidetracked from pursuing new business with one of the richest and most powerful companies in the world helping drive the profit ship.

The news that Apple might be shifting towards a more self-reliant chip production model has slightly scared the semiconductor sector as a whole. The top five semiconductor ETFs in 2016, based on assets managed and performance, were all down at least 1% through Tuesday morning trading. Direxion Daily Semicondct Bull 3X ETF’s (SOXL) stock was down 3% to $71.31.

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