- Apple investors should be skeptical of the recent 78 million iPhone 7 report.
- This would imply y/y growth well ahead of reasonable estimates, making it unobtainable.
- Furthermore, it’s worth noting that analysts aren’t revising estimates higher on the report.
It doesn’t seem like analysts are buying into the hype generated from the purported 78 million iPhone 7 supplier order. This is partially driven by the lack of credibility of the reports, and the source being broadly unknown, as the originally cited story is technically in Mandarin from Economic Daily News.
Now, who knows? The report could ultimately prove accurate, but with analysts at independent research firms and Wall Street banks unwilling to raise shipment estimates, the alarms should be ringing.
For starters, many of the big investment banks own tons of Apple (NASDAQ:AAPL) stock via their client portfolios. With many of the analysts either lowering or maintaining estimates in response to the report, I would avoid modeling estimates of 78 million iPhone 7 units.
I think, there’s a lot of incentive coming out of a disappointing year to be more conservative, but on the flip side, there hasn’t been any confirmation from component suppliers of a bigger component order. Now, that may change as we progress towards the end of the fiscal year, but that’s more of a Q3’16 theme to watch out for. Furthermore, the supply chain checks tend to be more indicative and offer foresight up to a quarter prior to the actual earnings report. So, we’ll need to wait for 3-months before preliminary data points are accurate enough to hang our collective hats on.
IDC Lowers CY 2016 iPhone Shipment Numbers
The irony is that IDC on June 1st 2016 slashed global smartphone shipment estimates even lower. It’s also worth noting that they anticipate iPhone shipments to decline for the first time. I believe some of this is driven by CY Q1’16 to Q3’16 results being so weak, and the incremental upside from CY Q4’16 is unlikely to drive y/y shipment growth even if iPhone units were to exceed 80 million in the holiday quarter. In fact, Apple would need to drive 90 million+ in iPhone shipments in Q1’FY’17 to reach flat y/y calendar year comps (dependent on what you’re forecasting for the next two quarters).
Here’s what IDC stated in its most recent press release:
Apple is expected to face its first down year for iPhone in 2016 with shipments dropping from 232 million in 2015 to 227 million in 2016. The expected decline of 2% year over year is a significant change from past years' growth and marks a pivotal moment for the company. IDC believes Apple can bring iPhone back to growth in 2017 and beyond supported by its early trade-in program as well as the lower cost iPhone SE.
If anything, I believe IDC is implying solid growth in Apple’s FY Q1’17, as it would take by my approximation roughly 84 million iPhone units in that specific quarter to translate into 227 million CY’16 iPhone shipments. I model 52, 44 and 44 million units for Q1’16 through Q3’16 (of CY 2016) and then add in IDC’s assumption on top. If anything, they’re implying roughly 16.34% y/y unit growth in Apple's Q1’FY’17, which is quite bullish when compared to the analyst consensus.
Analysts Remain Skeptical Of iPhone 7 Shipment Figures
84 million iPhone units is still a lot less than the implied shipment figure from the Economic Daily News, as 78 million iPhone 7 units translates into roughly 6 million units for the prior generation models inclusive of iPhone SE, which is extremely unlikely. In any given year, Apple’s unit mix to older models hovers around 30% of the total product mix. Therefore, the stock’s initial surge following the 78 million report was then followed by some selling, as many on the buy side were likely skeptical. I doubt any of the professional portfolio managers saw this as an opportunity to get more aggressive. If Apple intends to sell 78 million iPhone 7 shipments, you would then have to imagine total shipments exceeding 95 million for Q4’17 inclusive of prior generation models, which is… fairly unrealistic.
Recent analyst commentary implies shipment growth of around 5% for the next fiscal year:
We lower our iPhone estimates as we reflect our lower smartphone industry forecasts. We are reducing our FY16/FY17/FY18 iPhone unit forecasts to 211mn/231mn/223mn from 212mn/243mn/251mn, compared to consensus at 210mn/222mn/234mn. Further, driven by a greater mix shift to emerging markets (and the iPhone SE or its successors), we lower our FY17/FY18 iPhone ASP estimates by 2-3%. Overall, this drives an 8%/11% reduction to our FY17/FY18 EPS estimates, though we remain 7%/8% above consensus. – Simona Jankowski from Goldman Sachs
72-78M iPhone Production Bogey: Taiwan's Economic Daily this morning reported that Apple suppliers in China have been told to produce 72-78M new iPhones by the end of the year. This compares to consensus expectation of ~65M initial production for the new iPhone. Our Sep-qtr estimates stand at $50.9B/$1.99, which are above Street ($46.7B/$1.66). Looking into Dec-qtr, we currently model iPhone unit shipments of 78.5M (+5% y/y) vs. Street at 74M. – Amit Daryanani from RBC Capital Market
Although reports of 72-78mn iPhone 7 production are encouraging, we have decided to be a bit more conservative on units and ASPs. Our previous estimate of 4% iPhone unit growth in F17 assumed 45% of the F15 iPhone class would upgrade in two years. We are now more conservative and assume a 2.6 rather than 2.5 upgrade cycle with 40% of F15 phones upgrading in two years. We expect Dec to be 71mn units, down YoY. – Steven Milunovich from UBS
Apple has instructed suppliers to prepare for production of 72-78M iPhone 7 units by the end of 2016, according to an Economic Daily News report in Taiwan as reported by Bloomberg. While the production target would reflect the highest output target in two years, it is fairly wide. At the low end, the range implies a unit decline of 4% Y/Y, while the high end of the range points to 4% Y/Y unit growth. We remain cautious on the iPhone 7 cycle given expected limited new product features of the phone and believe the wide range in forecasts suggests uncertainty about end demand for the product. – Sherri Scribner from Deutsche Bank
Alright, so analysts really aren’t buying into the purported figure by Economic Daily News. In the end, we still rely on accurate supply chain checks to ensure validity of estimates. Many of the long-term iPhone estimates are based on iPhone refresh rate, and net additions to the installed base. So, some of the longer-term forecasting is finely tuned at this point. While not always accurate, the logic pertaining to refresh/installed base assumptions seem a lot more indicative of future results.
Furthermore, the revision to lower iPhone estimates by some of the investment banks can be broadly interpreted as a positive. It’s dubious that any of the buy side managers were anticipating total shipments to exceed 90 million units. So, if Apple delivers a quarter where the combined shipments of iPhone 7 and prior generation models exceed 80 million, we’d label that a success.
In other words, analysts are at least setting a low bar, so the company doesn’t fall over itself in Q1’17. This also reduces expectation risk. Therefore, investors should be wary of hype/rumors and should focus more specifically on whether Apple can at least attain low-teen shipment growth before worrying about 20%+ y/y growth. I think Apple can still deliver curve balls, and could very well upset expectations in the upcoming year with its 7-refresh.
However, I wouldn’t anticipate as wide of a beat as in prior fiscal years. Growth is definitely stalling in the smartphone space, and the growth strategy going forward is through lower-priced offerings in some of the faster-growing economies. Therefore, the incremental impact from new units may not translate into as much y/y revenue growth as in prior years. Thus making comps that much more difficult.
I continue to reiterate my buy recommendation and $107.72 price target.