The Apple A9 Samsung & TSMC Love Triangle

We are watching an Italian Opera of a standard love triangle….
The object of desire is the rich and beautiful Princess Iphonia Applelina being pursued by Prince Don Samsune and Count Don Tsemcee. Each is trying to prove their love for the princess. There are rumors swirling around about whom the princess has secretly promised her love and fortune to. The respective villages of the two suitors are both claiming that their nobleman is the one and true love of the princess whose heart has been betrothed to him.

The plot is further complicated by the young and sexy Countess Snap Dragonee from Qualcomia who is trying to steal away both suitors with her charms. In the background, the mysterious Arabian merchant Glabal Faadhil is hoping to have an affair with the princess so that he may get some of the leftovers of her fortunes. Meanwhile the princess has said nothing publicly except that the Crown Ball for her engagement party will be in the fall of the year but no one yet knows who will be on her ARM for the affair. The opera is full of the standard bit players of servants and interested parties who all have an axe to grind and an interest in the outcome. The endless rumor mongering of an opera is at full farce…..

How will this end?
Who will win? and who will lose?
The fat lady has yet to sing……

We still don’t know & we wouldn’t trade on it
We have been back and forth with the trade “rags” in Taiwan and Korea each claiming victory for the local team. This volley started months ago and its still likely too early to tell for sure. Now the latest rumor is that yield issues at Samsung has pushed business in the direction of TSMC. We don’t understand how this is new news as we have been very publicly talking about disappointing yields at Samsung for months now and how it doesn’t make either mathematical of financial sense given the current yields we have heard about.

Analysts are out there touting this as incremental information. Additionally its unclear that no matter what the financial arrangement that Apple would risk the iPhone 6S roll out on unstable process and poor yields. Is the A9 business really fungible?

The reality is that the Samsung 14nm process and the TSMC 16nm process flows are pretty far apart. The TSMC process is much more conservative and more like a warmed over 20nm design with FinFET rather than a full on new process which is closer to the Samsung description. Its not as if the business can be switched back and forth at the drop of a hat. As we have said in the past, Apple could “tape out” two designs, one for Samsung and one for TSMC and follow through to the end but obviously that’s a lot of work. They already have to tape out two designs, one for the A9 and one for the A9X (the Ipad processor) so we would really be talking about 4 potential designs.

This is much like all the speculation on Wall Street as to who won the DRAM contract for which phone and which device. In memory there is contract and spot pricing. Though its always nice to have a “locked in” contract , the reality is that the spot market is more profitable over the longer term as contracts are at a substantial discount to the spot market. So, are the DRAM contract winners really the stocks I should buy??

Will the winner be the loser?
Is the winner of Apple’s A9 business the real loser? Given the pricing we would expect and the way Apple treats its suppliers we think we know the answer to that question. So what does the winner get? Bragging rights? You can’t pay the rent or buy new chip tools with bragging rights. Investors seem to want to buy whomever wins the A9 business or whomever wins the DRAM contract but maybe they are buying the real loser in terms of financial performance. Spending this amount of time, ink and internet bandwidth over who has won what percentage of Apple’s business is not as productive nor as accurate a predictor of who the financial winner is or what the stock will be 6 months or a year from now.

Apple’s the real winner here…
Apple is playing its suppliers like a Stradivarius. We wonder when Apple will have its suppliers paying them to supply them parts. Much like the princess, Apple can lead both suitors on ad nauseam. They will kill one another to get to yield faster at better pricing. We wouldn’t cry for Qualcomm either as they get the benefit of Apple pushing the envelope so hard and can fall under Apple’s pricing and technology umbrella.

More like a TV soap opera…..
Whereas a real opera has some sort of an end, even though many end unrequited, this opera will go on almost forever. We will hear daily and weekly updates on the the dalliances of the players and it won’t end when the A9 winner is chosen because then we will have the A10 and A11 and on and on… This is going to be syndicated into endless reruns.

The stocks!
To be clear, we think that its near impossible to draw a very strong correlation between who wins what contract and the stock price. While it may lift revenues and bragging rights, its unclear as to the benefit to the bottom line. As we had mentioned in a previous note we thought that winning a bigger slice of the A9 pie could cause Samsung to choke on it when the semiconductor business is the only one making money there.

Also read: TSMC 2015 Technology Symposium

We continue to think that TSMC has played the smarter game in dealing with Apple and appears to be playing a more predictable, conservative game and remains very, very focused on the bottom line. For the equipment companies we could yet see a sudden rush of orders once the fat lady sings and one of the players actually has to produce the A9 in volume to make the iPhone 6S Crown Ball in the fall of this year. Until there is more clarity, we wouldn’t jerk around our portfolio based upon the rumor du jour as to who has what A9 business or it could wind up as a tragedy……..

Bravo!! Bravo!!