Yet Again, Apple Doubles Down on AR with Finisar Investment
Special thanks to Austin Bohlig for his work on this note.
This morning Apple announced they will be investing $390M in Finisar (FNSR), which is the company’s second largest vertical-cavity-surface-emitting-laser (VCSEL) supplier. VCSEL arrays are the key technology that powers 3D sensing applications such as Face ID, Animoji, and other face-mapping technologies through a flood immolator and dot projector on the front of the iPhone X. Apple is giving Finisar $390M to build a new 700,000-square-foot manufacturing plant in Sherman, Texas, which Finisar announced on the company’s earnings call last week (see here). Apple now has close relationships, with the two leading VCSEL suppliers, Lumentum and Finisar. Given how capacity constrained both these companies are, Apple’s investment shows the company is yet again doubling down on augmented reality. But more importantly, it locks down VCSEL supply, which will make it tough for other smartphone players to compete longer-term in AR.
Not New To Apple. This type of investment is not new to Apple as they have invested in key component suppliers in the past in order to lock up pricing and block out competitors. For example, Apple made large investments in the NAND suppliers during the iPod boom. Apple has been working with the two largest VCSEL suppliers in world, Lumentum and Finisar. While this investment will likely come across as bad for Lumentum, we do not believe Lumentum’s relationship with the company has necessarily been affected. Given the limited supply of VCSEL arrays worldwide, as well as the limited manufacturing capacity of Finisar and Lumentum, we believe Apple will need multiple suppliers in order to meet their demand targets. Additionally, Apple historically does not sole source key components.
Impact to Apple. Finisar’s capacity expansion initiatives were highlighted on the previous earnings call, and VCSEL demand trends were in line with previous comments, so we are not making any changes to our iPhone estimates. However, this announcement solidifies Apple’s intention to add the VCSEL array to all of its new phones starting the fall of 2018, and possibly to other products. Today, the VCSEL array is limited to the iPhone X. Most importantly, this investment shows the company is doubling down on AR again, and locks down the VCSEL market, which will make it tough for other smartphone players to compete in AR.
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