Bad omen for Apple report as supplier shares sink

Published Mon, Oct 26 201510:54 AM EDTUpdated Mon, Oct 26 201511:30 AM EDT

Shares of companies that make chips for the iPhone took it on the chin Monday after weaker-than-expected results from a key Apple supplier. Apple's stock followed, dropping more than 2 percent in mid-morning trading, as investors took this as a sign the world's biggest technology company will say future sales of the iPhone may disappoint Wall Street when it reports quarterly earnings Tuesday evening. Here's why: Dialog Semiconductor , a power-management chip vendor, traded down 19 percent in Europe as the company pre-announced a 5 percent sales miss and guided the next quarter lower than Street consensus. Apple constitutes 75 percent of Dialog's revenue, and the company's results have been highly correlated to iPhone sales during the last seven years, according to research firm AlphaValue "Based on our conversation with the company, we believe the lower than expected third quarter/fourth quarter sales is driven mainly by lower than expected unit demand at Apple, modestly lower than expected Bluetooth Smart sales ramp and weaker LED lighting driver sales," JPMorgan's Chetan Udeshi wrote in a note to clients Monday. Investors are wondering how iPhone 6S and 6S Plus sales will stack up to past upgrade cycles. Reading the tea leaves from Dialog, they may already have their answer. "Increasing saturation of the high end smartphone market and the extraordinary success of the iPhone 6 was always going to make growth in the 6S cycle difficult to achieve," Pacific Crest analyst Andy Hargreaves said in an email. "I believe the results from Dialog reflect that environment." Verizon commented on the iPhone product cycle and phone sales on its third-quarter conference call last Tuesday. Read More North American iPhone sales to fall 10%: Firm "So on the handset piece for upgrades, what I would say is we're anticipating a little less volume than last year because of the total iconic launch of the iPhone 6 and iPhone 6 Plus. But this quarter we're still anticipating a fairly heavy volume quarter, as every fourth quarter is, but I would anticipate a little less than what we saw last year" — Verizon CFO Francis Shammo said, according to a FactSet transcript. Other Apple suppliers declined after Dialog's miss. Skyworks Solutions fell 6 percent. Avago dropped 4 percent and Cirrus Logic shed 9 percent through midmorning. Read More Intel's data center warning to hit these stocks

Peter Parks | AFP | Getty Images

Shares of companies that make chips for the iPhone took it on the chin Monday after weaker-than-expected results from a key Apple supplier.

Apple's stock followed, dropping more than 2 percent in mid-morning trading, as investors took this as a sign the world's biggest technology company will say future sales of the iPhone may disappoint Wall Street when it reports quarterly earnings Tuesday evening.

Here's why: