In the latest Wall Street attack on Apple, one day after a report that the company is slashing its iPhone X production in half due to “surprisingly low demand”, today Deutsche Bank writes that Apple’s new IPhone models are too expensive to fuel a so-called “super cycle” and Street estimates for the March and June quarters are still too high.
In a note from Deutsche analyst Sherri Scribner, she repeats that recent datapoints on iPhone sales continue to point to weaker-than-expected demand for the new iPhone models (X, 8 and 8+), which as Scribner gleefully notes “is not a surprise to us” because “we have been arguing since last February, that iPhone demand expectations were too optimistic and that the higher price of new models would pressure unit demand. This appears to be playing out, with numerous Asian supply chain data points suggesting iPhone production plans are being cut.”
Deutsche also makes the point that the market cycle for iPhones is now a “refresh” one, not a super cycle one as the new features in the devices aren’t enough to drive non-early adopters to buy.
Adding salt to the wounds, the German bank claims that iPhone X demand is not living up to expectations, and explains that the 10th anniversary iPhone was expected to drive a strong iPhone refresh this fall, “with July 2017 Street expectations looking for iPhone units to be up 12% Y/ Y in FY-18.”
However, after initial tight supply due to component shortages, our checks of wait times for the iPhone X showed that the phone became more easily available by the end of November and improved through December. In addition, numerous Asian supply chain commentary from Digitimes, Taiwan Economic Daily, Reuters, and Nikkei have suggested that C1Q production build plans have been cut by up to 50% over the past month. Our Asian supply chain analyst Birdy Lu has remained more cautious on build plans, expecting 52M total iPhone units to be produced in C1Q-18, 25M which are expected to be iPhone X. Recent comments from Nikkei are even lower, suggesting total C1Q-18 iPhone production could be only 50M with iPhone X accounting for 20M.
A little history of iPhones and the progression of innovation from Apple, or lack thereof as the case may be in recent years:
Over the 10 years since the first iPhone was introduced, the form factor for smartphones has not substantially changed. Early on, the iPhone saw more significant reductions in weight and thickness with each new iteration, as well as improvements in display, speed, battery life and memory. However, in recent years, these feature changes have been more modest and largely undetectable to most smartphone users, with the average consumer having a hard time distinguishing between an iPhone 6 and an iPhone 8. As a result, we believe smartphone buyers aren’t as compelled to buy the latest phone when it comes out, because their current phone is generally about as good. In addition, the price of the iPhone and other high-end smartphones remains high, with Apple having an average selling price of roughly $650 over the past 2 years, making iPhones significantly more expensive than most televisions and gaming consoles, and about as expensive as many home appliances and an average personal computer.
We believe this increasing lack of interest in new phone models is supported by Google trends data. As seen in the chart above, Google searches for each of the new iPhone models released after the iPhone 6 have been lower. The chart shows the relative amount of Google searches for each phone in relation to the iPhone 6, which saw the highest searches (September 2014=100). As seen above, the iPhone 6 had the highest search interest, while the iPhone 6s saw only limited interest when it was announced in September 2015.
The iPhone 7 generated more interest, but the iPhone 8 and X both saw lower interest than both the iPhone 6 and the iPhone 7, based on worldwide search data. We believe this data confirms recent Asian supply chain data points that suggest demand for the new iPhone X and the iPhone 8 models are below expectations and that build plans are being cut. Interestingly, recent January searches for iPhone X and iPhone 8 have fallen to only 6% and 7% of the peak levels of iPhone 6 searches, respectively, which is the same as current search levels for iPhone 6 and iPhone 7. The search results are also lower than similar iPhone 6 searches post launch, with iPhone 6 seeing searches at 14% of peak levels 3 months post launch, while iPhone 8 and iPhone X are only seeing searches in the 6-7% of peak levels 3 months post launch. The Google data does not include China, which was a significant driver of growth during the iPhone 6 cycle. However, an analysis of Weibo posts by Reuters suggests that iPhone X mentions in December were only 5M versus posts during the same period for iPhone 6, which were more than 11M. While the iPhone 6 was extremely popular in China, the data suggests that the iPhone X is less than half as popular both globally and in China.
So what happened to the Super Cycle? Good question. For one, Deutsche was never convinced that Apple would see a “super cycle’ in FY-18, explaining the bank’s caution.
Our argument has been that the phones were too expensive to drive massive adoption, consumers are keeping their phones longer because of their high cost, the market is now only a refresh market, and the iPhone X features weren’t enough to drive non-early adopters to buy new phones. We believe these trends are now playing out, and we see risk to FY-18 Street numbers. Apple’s stock saw impressive performance last year, which we attribute to both the “anticipation trade” for iPhone X demand and the strength of overall markets, which drove passive and ETF purchases of Apple’s stock.
However, similar to past cycles when iPhone numbers were reset lower, it does not believe shares will be able to continue to outperform as Street numbers get adjusted down. Which brings us to the most important event due in just over 24 hours: Apple’s Q4 earnings. Here while Deutsche expects AAPL’s Dec Q results will be roughly in line, “we think Consensus numbers for the March and June quarters remain too high. Thus far, AAPL’s shares have not reflected lower-than-expected iPhone demand, as the stock has been helped by the strong markets and passive investment strategies. However, we expect shares to re-rate modestly lower over the next few quarters as iPhone numbers disappoint.“
Translation: Apple stock is going down.
Of course, that’s precisely what it has been doing over the past week as it decoupled from the FANGs…
… and may be set for even more downside now that dipped below the 100DMA.
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