iPhone unit sales concern overblown, doesn't cover Apple's business as a whole says Morgan...
Investors are overreacting to changes in the iPhone supply chain and manufacturing reports, Morgan Stanley suggests, with the company's continued Services growth highlighted as the better avenue for revenue increases than its hardware sales.
Apple Pay on the iPhone XS
Noting the 8.5 percent decline in Apple shares since iPhone component suppliers like Lumentumwarned of weaker results, Morgan Stanley analyst Katy Huberty insists investors "remain narrowly focused on units, despite the increasing value of Apple Services," according to a note received by AppleInsider. The various supply chain reports, and weak growth in Apple's most-recent quarterly results have led to some parties forecasting doom for the company.
Referencing a note from earlier in November, Services provides Morgan Stanley "confidence in long-term growth and valuation upside as Services becomes a key growth driver." As the smartphone market as a whole matures and reduces its overall growth, Services "takes the growth baton from devices," advises Huberty, which should result in "more stable growth and higher margins at Apple."
To emphasize this, Huberty adds the normalized Services revenue growth for the full year of 2018 accelerated to 26 percent year-on-year, despite iPhone units being down 6 percent in the two years prior to 2018. This is said to suggest "unit sales and installed base growth and/or user engagement are not as tied as investors may think."
"While investors generally support our Services thesis, news flow around units is creating volatility and a buying opportunity while the investor base is still in the process of transitioning away from units," the analyst declares.
On the supply chain revenue pre-announcement stories, Huberty believes Apple's guidance for the December quarter already takes these claims into account. The wider revenue guidance range of $4 billion instead of $2 billion does indicate a greater demand uncertainty, due to the larger number of product launches at this time of year, as well as more uncertainty over the economy compared to last year.
iPhone units and revenue as of Q4 2018
Huberty also adds that the unit revisions are typically more severe for the supply chain than Apple due to inventory fluctuations and more bullish launch supply orders. It is also believed Apple reached its normal run rate production earlier in the year than normal as there was a lack of labor or component constraints.
As a result for this earlier order normalization, Apple cut its supply chain orders in November rather than a "typical December/January timeframe." It remains to be seen if it is simply a shifting forward of production cuts, or if more refinements are on the way.
As for the reports themselves, Huberty advises "a look back at the past seven negative revision at iPhone suppliers suggests these data points don't predict future share price performance, particularly beyond a one-month period."
In response to investors querying the risk to Services gross margin as Apple continues to invest in lower-margin areas, such as music and video, it is thought Apple could expand the company's gross margin easily, assuming a close-to 60-percent gross margin in the arm with 20 percent revenue growth year-on-year versus the 35 percent gross margin of the "flattish devices business."
Apple's highest margin services, which are believed to be the App Store and Licensing, will increase in the product mix for the Services arm over the next several years, while AppleCare and iCloud margins are also expected to scale. "These dynamics actually argue for Services margins expanding in the next few years," Huberty suggests.
Morgan Stanley is not the only firm to pick up on the importance of the Services arm. Loup Ventures analyst Gene Munster has repeatedly put forward the idea of "Apple as a Service," with the portfolio of software services offering reliable growth and having more of an impact in increasing revenue over iPhone sales.
Apple Pay on the iPhone XS
Noting the 8.5 percent decline in Apple shares since iPhone component suppliers like Lumentumwarned of weaker results, Morgan Stanley analyst Katy Huberty insists investors "remain narrowly focused on units, despite the increasing value of Apple Services," according to a note received by AppleInsider. The various supply chain reports, and weak growth in Apple's most-recent quarterly results have led to some parties forecasting doom for the company.
Referencing a note from earlier in November, Services provides Morgan Stanley "confidence in long-term growth and valuation upside as Services becomes a key growth driver." As the smartphone market as a whole matures and reduces its overall growth, Services "takes the growth baton from devices," advises Huberty, which should result in "more stable growth and higher margins at Apple."
To emphasize this, Huberty adds the normalized Services revenue growth for the full year of 2018 accelerated to 26 percent year-on-year, despite iPhone units being down 6 percent in the two years prior to 2018. This is said to suggest "unit sales and installed base growth and/or user engagement are not as tied as investors may think."
"While investors generally support our Services thesis, news flow around units is creating volatility and a buying opportunity while the investor base is still in the process of transitioning away from units," the analyst declares.
On the supply chain revenue pre-announcement stories, Huberty believes Apple's guidance for the December quarter already takes these claims into account. The wider revenue guidance range of $4 billion instead of $2 billion does indicate a greater demand uncertainty, due to the larger number of product launches at this time of year, as well as more uncertainty over the economy compared to last year.
iPhone units and revenue as of Q4 2018
Huberty also adds that the unit revisions are typically more severe for the supply chain than Apple due to inventory fluctuations and more bullish launch supply orders. It is also believed Apple reached its normal run rate production earlier in the year than normal as there was a lack of labor or component constraints.
As a result for this earlier order normalization, Apple cut its supply chain orders in November rather than a "typical December/January timeframe." It remains to be seen if it is simply a shifting forward of production cuts, or if more refinements are on the way.
As for the reports themselves, Huberty advises "a look back at the past seven negative revision at iPhone suppliers suggests these data points don't predict future share price performance, particularly beyond a one-month period."
In response to investors querying the risk to Services gross margin as Apple continues to invest in lower-margin areas, such as music and video, it is thought Apple could expand the company's gross margin easily, assuming a close-to 60-percent gross margin in the arm with 20 percent revenue growth year-on-year versus the 35 percent gross margin of the "flattish devices business."
Apple's highest margin services, which are believed to be the App Store and Licensing, will increase in the product mix for the Services arm over the next several years, while AppleCare and iCloud margins are also expected to scale. "These dynamics actually argue for Services margins expanding in the next few years," Huberty suggests.
Morgan Stanley is not the only firm to pick up on the importance of the Services arm. Loup Ventures analyst Gene Munster has repeatedly put forward the idea of "Apple as a Service," with the portfolio of software services offering reliable growth and having more of an impact in increasing revenue over iPhone sales.
Comments
And us stockholders keep on LOL'ing
In this case, however, I feel she is right, as I share the same bullish inclination as her.
How stupid are these analysts? Apple doesn’t miss guidance, so how are they going to achieve another record quarter for revenues without selling a boatload of iPhones? Are Mac sales going to double to 10 million this quarter? iPad sales doubling to 20 million?
If they think iPhone sales are declining sharply then they must also think Apple will miss their guidance by billions of dollars (not going to happen) OR that miraculously Apple will make up lost iPhone revenues somewhere else (also not going to happen).
What I believe though is iPhone XR should have had the SE size factor with a lower price. XR is still gonna sell a boatload, I just think it could have sold more.
It doesn't take a genius to see that Apple isn't going to get double-digit growth from selling iPhones. The high-end smartphone market is already saturated and won't allow such growth. Sure, the greedy fund managers are pissed because Apple fell short of iPhone sales expectations and future guidance was conservative. They're not patient and would rather dump their Apple stock. That's their loss. Let's see if those greedy investors can find another safe haven for their money in this crazy stock market. Apple still looks pretty safe to me (and Buffett and a few mutual fund managers). I have no interest in running that quarter to quarter race. I play for the entire year and I believe Apple will still come out ahead of most companies.
Although Apple looks a bit ugly (shedding $209B in value), I think this recent selloff of Apple stock is a good thing for long-term shareholders. It makes it much easier for Apple to buy back more shares and for true believers in Apple to pick up more shares. Traders selling in a panic isn't a smart thing to do because it will just cost them more to get back in when Apple stock turns around and they've lost out on the dividends. It's best to keep a cool head with Apple and not go off half-cocked. What's a down month for long-term Apple shareholders? Not much. I'm feel certain Apple will recover all of its recent losses by early next year as long as the economy is good. I can't predict the future but I can always take a positive outlook which has worked well in the past for Apple shareholders.
Strengths (in no particular order)
1. MacOS and iOS are the best operating systems in their categories
2. Software tools/technology (Xcode, swift, etc) are very strong
3. Hardware design capabilities are strong
4. SOC design team is stellar
5. Commitment to privacy and security
Weaknesses (in no particular order)
1. Hardware design choices are sometimes poor (2013 Mac Pro being the ultimate example)
2. AI/ML capabilities and choices.... if Apple's weakness here could all be attributed to their commitment to privacy and security, that would be fine. But it can't. It's crazy that Google is doing better with computational photography when Apple has a vastly superior SOC.
3. iCloud is kind of meh. People use it because it's the default option, and it's not terrible. But it's not really better than the competition. and removing features like Back to My Mac, doesn't help.
4. Original entertainment content -- not clear they really should even need to do this, but so far there's no sign they're doing it well. I think part of the problem is that they wasted years trying to negotiate with the big content providers, failing to realize that this wasn't like the record labels in the Napster era.
5. Pro computer hardware design choices have been poor for many years, but they are getting better.
Bottom line:
Apple has industry-leading technology/capabilities in everything with the exception of AI/ML, where they are kind of mehThe AI/ML situation is definitely fixable, though.
I think Apple's weaknesses mostly connect to bad product decisions made at higher levels of management. However, it does seem that Apple has the ability to recognize and correct mistakes.... it just takes longer than it used to.
So.... I think Apple overall is still a great company and the stock pullback is overblown. Apple clearly misses Steve Jobs, but nobody else has him either.
Most analysts have simply lost their minds, and continue to rely on the ever-unreliable "channel checks" (a.k.a. "called my local Apple store and maybe a couple of others before I went out to play golf."