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Apple Expands OLED Supplier Base, Lowers Samsung Dependence

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Apple (AAPL - Free Report) has reportedly made some progress in solving its component supply woes related to organic light-emitting diode (OLED) screens.

Per Bloomberg, the iPhone-maker is set to receive its first batch of OLED screens for new iPhone model from South Korea’s LG Display Co.

Apple, in order to expand its supply chain, reportedly invested more than $2 billion in LG, last year. The company is the sole supplier of OLED screen of Apple Watch.

However, owing to some manufacturing problems, LG had difficulties to move into mass production of OLED screen. The company is now expected to ship 2-4 million units, initially.

Apple Inc. Price and Consensus

Apple Inc. Price and Consensus | Apple Inc. Quote


Apple was also in talks with China’s BOE Technology Group Co. to supply OLED displays for iPhones.

Notably, Apple has also been rumored to develop next-generation MicroLED screens for its own use. We believe bringing display manufacturing in house makes sense for Apple as it will no longer have to depend on others for supply of display screens.

Supplier Base Expansion Good for Apple

Apple is expected to launch three iPhone models this year, two out of which — a 5.8-inch second-generation iPhone X and a larger 6.5-inch iPhone X Plus — are expected to come with OLED displays. The low-cost third one is likely to be a 6.1-inch LCD (liquid crystal display) variant.

Moreover, Apple is reportedly planning to use OLED display panels in all three new iPhone models planned for next year.

In such a scenario, the expanding supplier base not only reduces Apple’s dependence on Samsung, its sole supplier of OLED screens, but also improves bargaining power in terms of pricing.

Higher OLED procurement cost has been primarily blamed for iPhone X’s exorbitant starting price of $1,000. Per KGI analyst Ming-Chi Kuo’s estimates, Apple pays Samsung in the range of $120-$130 per unit. This is significantly higher than iPhone 7 Plus’5.5-inch LCD, which costs $45 to $55 per unit.

The highly anticipated device failed to generate significant demand, due to premium pricing. Apple also had to cut production, due to lack of demand.

Moreover, Apple had to delay the launch of iPhone X, due to the lack of adequate number of OLED screens, which also hurt its holiday season sales. Hence, the increased volume of OLED screens will help Apple reduce the time to market for its new iPhones.

However, Apple’s transition to OLED is a serious concern for its LCD screen suppliers like Japan Display and Sharp that lag in OLED production.

Zacks Rank & Other Stocks to Consider

Currently, Apple has a Zacks Rank #3 (Hold).

HP Inc. (HPQ - Free Report) , Adobe Systems (ADBE - Free Report) and Verint Systems (VRNT - Free Report) are stocks worth considering in the broader Computer and Technology sector. While HP has a Zacks Rank #2 (Buy), Adobe and ANSYS sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long term earnings growth rate for HP, Adobe and Verint is currently pegged at 6.52%, 16.20% and 10%, respectively.


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