This analyst report was written by analysts Timothy Arcuri and Munjal Shah
Apple Inc.
Apple iPhones weakness; Market or Share Loss?
Nearly all of our investor discussions post the AAPL miss centered on the question of whether China weakness is AAPL-specific, or general market weakness. We analyzed data from multiple sources – Apple’s China revenue implied in the release, Gartner, and data from China government (MIIT). Historical data from these sources suggests a fairly close correlation, adding some confidence in our China iPhone unit estimate. Based on monthly China MIIT data, the market has contracted mid to high teens Y/Y for much of 2018. While it could have been much worse in December month, we assume ~20% YoY decline assumption for the December month. Against this backdrop, we estimate that AAPL lost ~5-7 points of market share in CQ4:18 versus a year ago – a number about 2x what Gartner had been estimating prior to the preannouncement. While the China market is clearly soft, it is hard not to conclude that AAPL has lost China share.
iPhone demand appears to have fallen off precipitously in the month of Dec.
Based on AAPL’s comments in the release, we est. AAPL’s CQ4 Greater China rev was no more than ~$13.5B. Assuming 70% iPhone mix (a little heavier than corporate avg) and assuming ASP roughly in-line, we est CQ4 China iPhone shipments of ~11MM. According to China MIIT data, we calculate Apple shipments in China were ~9-10MM through the first 2mos of the Q, thus implying that shipments in Dec month may have only been a couple of MM units. iPhone XR was weak since launch, but this much of decline could imply some potential backlash to the Huawei event and trade issues.
This sets a very low base for China iPhone shipments exiting C2018, a factor we have tried to consider in our CQ1/CQ2 iPhone unit forecasts of 43 and 35Mm. It is possible, however, there could be intensifying backlash against AAPL products in China including Chinese corporations incentivizing consumers to purchase Huawei phones. A trade deal between US and China may ease some pressure, but this is difficult to predict.
Our $180 PT is based on 24x to recurring revenue and ~10x to non-recurring (hardware + AppleCare). Slower iPhone growth is a headwind to services, but AAPL still has huge untapped base (600mn+ active iPhones pay zero) and new bundle appears very likely.
Share loss in China
We further analyzed iPhone shipments in China based on data available from different sources – 1) Apple’s reported Greater China revenue, 2) Gartner, and 3) China MIIT data. We conclude Apple lost share on a year-over-year basis in the December quarter with the month of December likely being particularly bad.
Gartner and MIIT data shows similar market share trend for iPhones versus the overall smartphone shipments in China.
In terms of the premium segment of the China market, Apple is losing share there too with roughly 32% share in September quarter down from 34% a year ago and a steady decline since December 2017 quarter.
We correlated our iPhone unit shipments in China from three sources – Apple’s reported revenue, Gartner and China MIIT. The shipments are fairly close, within 1-2 million on a quarterly basis, which gives us confidence in our iPhone unit shipments into China.
Based on the available data, we predict December quarter China iPhone units in the range of 10-11 million.
Apple noted most of the revenue shortfall in the December quarter versus their guidance was coming from Greater China. Based on that we believe Greater China revenue would be roughly $13.5 billion in the December quarter. Assuming 70% iPhone mix, we estimate iPhone unit shipments of roughly 11 million.
We also looked at the monthly data from China Ministry of Industry and Information Technology. Based on the reported numbers for the months of October and November and the total December quarter estimate of 11 million derived above, we calculate iPhone shipments in China in the month of December were roughly 1-2 million, a sharp sequential and year-over-year decline.
