While viewing Apple's (AAPL) decision to no longer use Imagination Technologies' intellectual property in its new products as a surprise, Morgan Stanley analyst Francois Meunier told investors in a research note that this is not the first time something similar has happened in the iPhone maker's supply chain. Speculating on what the move could mean to other suppliers, the analyst said he favors Dialog Semiconductor (DLGNF) over STMicroelectronics (STM), and Broadcom (AVGO) over on Skyworks (SWKS).

SIMILAR TO PAST SITUATIONS: Commenting on the news that Imagination Technologies has been dropped by Apple, its largest customer, for its GPU core as the latter brings work in house, Morgan Stanley's Meunier told investors that the iPhone maker's decision took Imagination and the market by surprise, but noted that this is not the first time this has happened in Apple's supply chain. For that reason, the analyst argued that a discount should be applied to Apple suppliers' valuations. The situation for Imagination does not look much different from past occurrences at Wolfson Microelectronics, CSR (CSRE), Sigmatel and Portal Player, he contended. The analyst pointed out that Wolfson was the sole supplier of audio chips to the iPhone and iPods until it was dropped by Apple and bought by Cirrus Logic (CRUS), while Portal Player and Sigmatel were involved in the first iPods main chips and were replaced by a co-design by Apple and Samsung (SSNLF). Similarly, CSR was involved in the first iPhone for its Bluetooth chip and was replaced by Broadcom, he added.

BULLISH ON DIALOG, BEARISH ON STMICROELECTRONICS: Morgan Stanley's Meunier told investors that he prefers Dialog Semiconductor over STMicroelectronics given the lower valuation and no need to spend on capex. The analyst reiterated an Overweight rating on Dialog, noting that despite having a 75%-80% revenue exposure to Apple, it trades at the low end of the sector range. Conversely, Meunier reiterated an Underweight rating on STMicroelectronics, saying that while the company is about to increase its exposure to Apple with not only a time-of-flight chip but also with a new camera module for the new iPhone, the recent share price increase and material change to consensus earnings expectations has already been linked to that new design win.

INCREASING COMPETITION IN RF: Additionally, Meunier argued that, in the near-term, he does not anticipate anything as extreme as the Imagination development in RF, while highlighting nonetheless increasing competitive overtures. Growth in RF dollar content in the iPhone is beginning to flatten out after a tripling of supported LTE bands in recent years, the analyst pointed out, adding that the tech giant now has greater flexibility in shifting between suppliers in both low band PADs with Qorvo (QRVO) and Skyworks, and diversity receive modules with Skyworks and Murata. Meanwhile, he believes Broadcom remains in a "strong position" and insulated near-term in the mid/high frequency bands given its leading position in premium filters and significant lead in CA multiplexers. The analyst reiterated an Overweight rating on Broadcom and an Underweight rating on Skyworks.

PRICE ACTION: In morning trading, shares of Apple are fractionally up to $114.06. STMicroelectronics, Qorvo and Broadcom are fractionally lower and Skyworks' stock has gained about 2%.