Will Apple Manage To Exceed Low IPhone Sales Expectations?

  •  Wall Street has a  poor outlook on iPhone sales in 2016 and it keeps getting worse.
  • Channel checks for major Apple suppliers are not very encouraging either.
  • Are there any catalysts that can change the narrative for Apple?.

The Street has lately been very pessimistic about Apple (NASDAQ:AAPL) iPhone demand outlook, and the outlook keeps getting murkier. Now SMBC Nikko Securities has slashed its 2016 iPhone demand outlook from 220M units to just 190M, representing a huge 18% Y/Y decline. SMBC says that channel checks have revealed that there is excessive iPhone inventory lying around that calls for a second round of production cuts by Apple.

While these channel checks have not always proved to be very reliable in the past, it’s undeniable that iPhone sales have definitely been trending lower over the past three quarters. But that’s not all--Apple has lately been consistently failing to meet analysts’ estimates for iPhone unit sales thus making an already bad situation look worse. Unit iPhone sales is a very closely watched metric for Apple, and the company’s share performance suffers whenever unit sales fail to meet expectations even when revenue and earnings exceed projections.

Also Read: Why The Apple-iPhone 5se May Not Be A Game Changer

Here’s how Apple’s reported iPhone sales have been comparing to estimates on The Street over the past five quarters:

Quarter     Street Expectations            Apple Reported iPhone Unit Sales     Difference
Q1 2015                65.5M          74.5M       9M
Q2 2015                 58.1          61.2M       3.1M
Q3 2015                48.8M          47.5M       (1.3M)
Q4 2015               48.96M          48M       (0.96M)
Q1 2016                75.46          74.8M      (0.66M)

The current consensus street estimates for Apple in 2016 are 220M-230M units, which points to an year-over-year decline of 2.7% at the midpoint. Wall Street is currently very pessimistic about iPhone sales in 2016 with many analysts predicting high single-digit declines in iPhone sales in 2016. The second quarter is expected to be the nadir when unit sales are expected to tank 20%, the worst record in the history of the iPhone.

Apple-3

Source: Business Insider

Many of these channel checks by analysts have in the past proven not to be a very reliable predictor of iPhone sales. Apple itself has in the past warned investors against reading too much from analysts checks. But the signals are too strong this time round for investors to ignore.

Japan’s Nikkei reported in January that Apple planned to cut production of iPhone 6 and iPhone 6s by 30% in a bid to control excessive inventory.

Sales trends and guidance by major Apple component suppliers are usually a good barometer of Apple’s business. Several suppliers have already sounded the alarm:

  • Qorvo (NASDAQ:QRVO), the manufacturer of radio frequency products, issued weak Q1 2016 guidance.
  • Cirrus Logic (NASDAQ:CRUS) also issued weak Q1 2016 guidance calling for year-over-year revenue declines.
  • Largan Precision, the manufacturer of Apple’s camera lens and casings, reported a 30% decline in sales during the last quarter.
  • There were rumors that Foxconn, an iPhone assembly plant, was planning massive staff layoffs.

China has frequently come to the rescue of Apple, posting strong growth when the company’s other markets are showing malaise. China has over the past few years become Apple’s fastest-growing market, and is now the second largest after the U.S. During the last quarter, sales in China grew 18% to $18.4B, the best growth amongst all of Apple’s geographical segments, but a dramatic slowdown from the previous quarter when revenue had almost doubled after growing 99%.

Apple managed to barely avoid recording its first year-on-year revenue decline during the last quarter when revenue was up just 2%. Flatlining iPhone sales are primarily to blame for this unfortunate trend. iPhone sales follow an almost predictable two-year cycle where one year of major upgrades is frequently followed by modest improvements when Apple launches the ‘‘s’’ model. But these incremental upgrades are usually not enough to drive enough customers through the doors and only serve to prevent serious sales declines for Apple before it launches the next big thing. iPhone 6s, therefore, won’t cut if for Apple.

Apple might get some much needed reprieve during the latter part of the year when it launches iPhone 7 sometime in September this year. Rumors are that iPhone 7 will sport a completely new design from all its predecessors with a better screen, faster processor, and a much-improved camera. That will probably be enough to drive a new wave of interest in the iPhone.

Investor Takeaway

Investors can expect the first half of the year to be pretty rough for Apple due to weak iPhone sales and lack of any strong catalysts for growth. The latter part of the year, however, could bring a major boon for Apple and its investors. The Street, might therefore, continue  to have an upper hand till then.

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Comments on this article and AAPL stock

user profile picture
coldspring21
neutral
It's actually worse than that. 74.8M as reported by this article are units SHIPPED by apple, not sold. Per Gartner, Apple sold only 71.5 million iphones in Q1 2016, making drop of 3 million iphone units from Q1 2015 when Apple sold 74.5 million iphones.
reply
user profile picture
virendra
bullish
71.5 million is still huge!! And at iPhone ASP it means gigantic!! No other company comes close. With Apple stock at all time low valuations, upside risks far outweigh the downside risks, which are already baked into current price.
Do share this awesome post