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What Are Analysts Saying About Apple’s Shock China Sales Warning? JPM, BAML, And UBS

What Are Analysts Saying About Apple’s Shock China Sales Warning? JPM, BAML, And UBS

J.P. Morgan

North America Equity Research

This analyst report was written by Samik Chatterjee, Gokul Hariharan and Narci Chang

 Apple

Monthly Slice: Supplier Tracker Deceleration; Momentum on Video; Look for Inorganic Services Acceleration

We are launching our inaugural monthly wrap-up to keep investors briefed on the latest revenue trends from a sampling of iPhone suppliers, latest feedback received from Apple supply chain companies by our Asian technology team, as well as our latest thoughts on the most relevant news stories over the last month.

  • Our iPhone Supplier Tracker decelerated further in December, and marked the first y/y decline since November 2016. Aggregate revenues for the suppliers in our tracker declined by -4% y/y in December (vs. +9% in November, and +17% in October), marking the first y/y decline since November
  • Quarterly supplier revenue trend decelerates as well in C4Q18; points to continued iPhone revenue decline in C1Q19. On a quarterly basis, our iPhone Supplier Tracker decelerated to +7% y/y in C4Q18 from +17% in C3Q18. The strong historical correlation between our iPhone Supplier Tracker and iPhone revenue growth (see Figure 3) leads us to conclude that the deceleration in supplier revenue growth points to continued iPhone revenue declines in C1Q19 (F2Q).
  • 2019 iPhone models unlikely to involve major upgrades; 2020 refresh could drive AR/VR leadership. Based on latest feedback from the Apple supply chain, we believe 2019 iPhone models are unlikely to involve significant upgrades, except for OLED/LCD models moving to triple/dual camera configurations. While still uncertain, we now believe the adoption of world-facing 3D sensing is less likely in 2019. In 2020, we expect a more material refresh, including adoption of world- facing 3D sensing, substantially greater support for AR/VR applications, inclusion of 5G modems, and a material change on display/casing form factor.
  • The most frequent question from investors is relative to state of the China smartphone market and Apple’s position in it. Following recent announcements from Apple and Samsung, the most frequent investor question we have received is relative to the state of the China smartphone market. Our latest checks indicate the smartphone market in China could be down as much as -20% y/y in C4Q18, which would imply that although Apple is losing share due to a combination of increased competitiveness of local brands and negative sentiment on US companies, share loss is unlikely the primary driver of the weakness for Apple in China.
  • Increasing momentum in positioning Apple to capitalize on a media services opportunity. Apple’s deals with media companies over the last month, including DHX media and A24, further reinforces the focus on delivering original content to increase the value of the “ecosystem”, which can be monetized either through a separate “Media” subscription offering to consumers or through an advertisement based model similar in some aspects to Roku.
  • See increasing likelihood of acquisitions to accelerate transformation to Services. While Apple has executed on the Services opportunity better than expected by consensus, the headwinds to iPhone unit volumes is underscoring the need to further accelerate the transformation to Services. In addition to the focus on capitalizing on a media services opportunity organically, we see increasing likelihood of acquisitions to accelerate the transformation, including of media content delivery platforms and mobile gaming platforms to allow even stronger leverage of its installed base of devices.

Next … UBS …