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Apple’s (AAPL) iPhone: Is This Really a Recovery?

support@smarteranalyst.com (Ben Mahaney)

Apple (AAPL) could be experiencing a much-needed turnaround or improvement in shipments for iPhone devices, according to UBS analysis. The good news tied to the Asian supply-chain might have been missed, as a couple investment banks downgraded Apple stock this past week (New Street Research and HSBC). While some of the comments relating to Apple’s demise pertain to the aging installed base, and diminished growth in first-time iPhone buyers, the Chinese narrative is expected to improve based on more recent supply chain channel checks.

The stock has remained sideways/flat for the past couple days despite running all the way up to $200 per share. Some of the momentum was tied to service revenue and the launch of new services, but another major reason has been the recovery in equity prices in general, which Apple has been a beneficiary of. But, a third potential catalyst is a recovery in Chinese iPhone shipments, which could play out over the course of 2019 until we have an updated slate of iPhone’s to work with in September.

UBS Analysis, Timothy Arcuri mentioned that March Chinese iPhone shipments have improved from what were already dismal results in the region:

Analysis of monthly government smartphone sell-through data from China suggests the annual rate of decline for Apple iPhones improved slightly in March (down 61% YoY vs ~68% in the prior three months). Sequential MoM growth of 67% in March was higher than ~40% a year ago based on our estimates since prior year data by operating system was unavailable. Apple likely benefitted from overall China smartphone market improving (down 4% YoY vs double-digit declines in 8 of the prior 9 months and sequential improvement of 93% was higher than 60% a year ago) as well as its price actions being effective. Overall, the data is slightly positive because iPhone is a top issue for investors and the sentiment appears to be neutral.

Initial read-through from the Chinese market suggests a meaningful improvement in monthly comparisons from March versus February and January. Assuming, March shipment inflection continues the financial outlook from Apple might improve when they announce earnings on April 30th, 2019.  Apple blamed the poor performance from its iPhone unit due to a decline in shipments from the China region.

It’s worth noting that the smartphone market in China had pulled-back in general by double-digits or 10%, according to IDC in 2018. So, the softness in iPhone results weren’t isolated to just Apple, but other smartphone OEMs as well. IDC also reported that global smartphone shipments declined by 4.1% in 2018 globally, so the shipment narrative has been weak for all smartphone OEMs including Apple, and the semiconductor companies that supply parts to mobile devices.

The sentiment has weakened to new lows for Apple with most having a neutral bias according to a UBS Survey:

The sentiment on Apple is neutral with 47% indicating "neutral" and roughly similar percentages for "bullish" at 28% and "bearish" at 23%. The sentiment is down from October when nearly 70% were indicating "bullish" or "very bullish" sentiment. The neutral stance is in line with the data from UBS Quantitative Research team showing AAPL as one of the biggest global underweights among active investors. It could suggest further upside potential if iPhone performs in line to better.

Bottom Line

Investors have already diminished their expectations tied to iPhone units/shipment figures, which sets-up investors for a potential beat on financial results tied to a recovery in the second half of 2019. Smartphone weakness might not continue for much longer, and with prior-year shipments so weak to begin with a modest recovery could swing some bullish momentum back into the stock, especially if financial outlook from Apple surprises by a couple percentage points due to a shipment recovery in China. Also, with every other smartphone OEM exposed to the same weakness in smartphone shipments, Apple does remain best-in-class, and could weather this storm more effectively than what investors or current consensus expectations imply.


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