iPhone unit sales concern overblown, doesn't cover Apple's business as a whole says Morgan...

Posted:
in AAPL Investors
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
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
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

  • Reply 1 of 16
    Woah. An analyst without a reactionary, over the top response to the same old, tired, nonsensical supply chain rumors. 
    buttesilvergilly33n2itivguyStrangeDaysDAalsethracerhomie3chasmwatto_cobrajony0
  • Reply 2 of 16
    Have you noticed that all the suppliers that are reporting slowdown are around the Face Recognition sensors? I think they were banking on Samsung and the other Android phone makers to adopt this technology and they can't so they all had to cut forecast.. I assume that Apple sales will probably be up..
    gilly33n2itivguyRonnnieOwatto_cobrajony0
  • Reply 3 of 16
    Woah. An analyst without a reactionary, over the top response to the same old, tired, nonsensical supply chain rumors. 
    Yeah, hard to imagine, right?  Only been this way since the dark days of the 90's BS (before Steve 2.0).
    And us stockholders keep on LOL'ing :smile: 

    andrewj5790watto_cobra
  • Reply 4 of 16
    Woah. An analyst without a reactionary, over the top response to the same old, tired, nonsensical supply chain rumors. 
    Well, Katy Huberty has been quite bearish in the past, she usually chimes in after other analysts have spoken, and a few quarters ago had to make a public apology for how wrong she was with her supply side doom and gloom prior to earnings.

    In this case, however, I feel she is right, as I share the same bullish inclination as her.
    gilly33chasmwatto_cobra
  • Reply 5 of 16
    Guten Morgan. 
  • Reply 6 of 16
    Guten Morgan. 
    LOL
    SpamSandwich
  • Reply 7 of 16
    Woah. An analyst without a reactionary, over the top response to the same old, tired, nonsensical supply chain rumors. 
    Yep good to see for a change. 
  • Reply 8 of 16
    Apple has issued guidance for this quarter at $89-93 billion.

    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).
    AppleExposedwatto_cobra
  • Reply 9 of 16
    https://seekingalpha.com/article/4222568-apple-investors-touch-reality
    Hey Jim, we need to buy some Apple stock. Can you pay your goons to run some articles? Maybe it will push the price even lower...
    Lol. I guess, they wanna drop the price even lower.
    watto_cobra
  • Reply 10 of 16
    Apple has issued guidance for this quarter at $89-93 billion.

    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).
    It's not so much that iPhone sales are declining sharply. It is more that the anticipated bump in sales due to the release of the XR is in doubt. Expectations were high that the XR would sell well and consistently throughout the year.and now supply chain rumors have thrown doubt on that prediction. Given that services had been increasing at a 20% rate for the past few years it should account for almost $2B in additional revenue in Q1, Apple could see a decline in iPhone revenue of over $1B compared to last year and still meet the low end of their guidance. That's pretty much the point of the article. Investors and analysts are overly focused on the iPhone market maturing while services continues to grow at a much greater pace. Even if iPhone sales drop Apple is still in good shape as far as the future goes.
    minicoffee
  • Reply 11 of 16
    AppleExposedAppleExposed Posts: 54unconfirmed, member
    78Bandit said:
    Apple has issued guidance for this quarter at $89-93 billion.

    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).
    It's not so much that iPhone sales are declining sharply. It is more that the anticipated bump in sales due to the release of the XR is in doubt. Expectations were high that the XR would sell well and consistently throughout the year.and now supply chain rumors have thrown doubt on that prediction. Given that services had been increasing at a 20% rate for the past few years it should account for almost $2B in additional revenue in Q1, Apple could see a decline in iPhone revenue of over $1B compared to last year and still meet the low end of their guidance. That's pretty much the point of the article. Investors and analysts are overly focused on the iPhone market maturing while services continues to grow at a much greater pace. Even if iPhone sales drop Apple is still in good shape as far as the future goes.
    Every iPhone casts doubt. Every iPhone has "cut production" according to analysts. So nothing new here.

    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.
    watto_cobra
  • Reply 12 of 16
    Awww! The greedy big investors were counting on that "supercycle" some analysts were talking about. I never thought there would be any "supercycle" and I was right. Of course, I'm not going to be dumping my Apple stock on the open market because my expectations aren't as high as some. In this economy, I don't expect everyone will be rushing out to buy the latest models of iPhones when the citizens of the BRIC nations are going to be buying $100 - $200 Android smartphones or even (crazier) feature-phones. I only expect Apple to be able to slightly grow its already large iPhone installed base to create Services revenue and profits.

    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.
    edited November 15 muthuk_vanalingam
  • Reply 13 of 16
    ksecksec Posts: 1,516member
    When Morgan Stanley suggest not to worry, I am very worry.
  • Reply 14 of 16
    blastdoorblastdoor Posts: 1,884member
    I view Apple's current strengths and weaknesses as follows:

    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. 
  • Reply 15 of 16
    LatkoLatko Posts: 157member
    78Bandit said:
    Apple has issued guidance for this quarter at $89-93 billion.

    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).
    It's not so much that iPhone sales are declining sharply. It is more that the anticipated bump in sales due to the release of the XR is in doubt. Expectations were high that the XR would sell well and consistently throughout the year.and now supply chain rumors have thrown doubt on that prediction. Given that services had been increasing at a 20% rate for the past few years it should account for almost $2B in additional revenue in Q1, Apple could see a decline in iPhone revenue of over $1B compared to last year and still meet the low end of their guidance. That's pretty much the point of the article. Investors and analysts are overly focused on the iPhone market maturing while services continues to grow at a much greater pace. Even if iPhone sales drop Apple is still in good shape as far as the future goes.
    The last is a ridiculous statement as no one knows the margins on iPhones and/or on services - let alone would be able to compare. Market saturation is a big issue. Maybe the biggest TIm has ever faced. History learns that moloch incumbents of this size tend to become their own worst enemies
    edited November 16
  • Reply 16 of 16
    chasmchasm Posts: 997member
    Although Apple isn't going to break out the sales figures for each make of iPhone (exactly the same has they never have) or the iPhone as a whole -- the guidance is, at minimum, record-breaking. There is no way that an iPhone model that is 90 percent of the top model at 3/4ths the price isn't going to be the top or second-top selling model they have.

    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."
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