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Goldman Slashes iPhone Sales Estimates Due To "Demand Deterioration"

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Two months after the Nikkei reported that Apple will halve its production target for the iPhone X in the three-month period from January from over 40 million units to around 20 million, in light of slower-than-expected sales in the year-end holiday shopping season in key markets such as Europe, the U.S. and China, and after JPM similarly warned that production of Apple's flagship phone would plunge of 50%, "even larger than the decline of the iPhone 8/8+" and noted that the "weakness will continue in 1H18 as high-end smartphones are clearly hitting a plateau this year"...

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... this morning Goldman joined the Apple skeptics when the bank's analyst Rod Hall wrote that demand expectations for March and June quarters are already weak but early Q1 demand indicates "even lower actual numbers than consensus is modeling" and as a result, he is trimming his replacement rate expectations in response to what has been weak replacement consumer behavior this cycle.

Below is the gist of the note:

We reduce our replacement rate assumption for FY’18 by ~2pp to 33% from 35% earlier due to weaker than expected demand for the iPhone X. We have cut our Chinese replacement rate by 3pp to 19% for FY18 and also reduced our ex. China replacement rate by 1pp to 38%. Further, we cut FY’19 and FY’20 replacement rates by 1pp each to 32% and 29% respectively. We note that our assumptions for FY19 could prove conservative if larger format devices drive a better cycle in China this coming December quarter though we believe that data so far suggests that a more cautious approach is prudent.

We now forecast the overall replacement rate to drop by 7pp over the three years from FY’17-FY’20 similar to what we calculate occurred from FY’14-FY’17. This may appear overly conservative on its face but we point out that replacement cycles in emerging markets where iPhone base growth is highest tend to be materially lower than in developed markets where most Apple analysts reside.

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In light of this, Hall cut his iPhone sales estimates for the March and June quarters by 1.7 million and 3.2 million units to 53 million and 40.3 million units respectively.

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He also cut his 2019, 2020 iPhone revenue and net income forecasts: Goldman now sees revenues decrease by 2.4% and 2.7% to $256.6bn and $272.5bn for FY’18 and FY’19 respectively; the company's revised revenue estimates for FY’18 and FY’19 are 2.2% and 0.4% below consensus, while its net income estimate for FY’18 is 2.2% below consensus and for FY’19 is 1.2% ahead.

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On a shipment and ASP basis, Goldman cut its FY’18, FY’19 and FY’20 iPhone shipments forecasts by 3.5%, 4.0%
and 1.8% to 217.3m, 223.8m and 223.4m units respectively - below consensus estimates of 221.3m, 226.8m and 238.3m units. However, the bank's ASP estimates for FY’19 and FY’20 are 1.6% and 4.0% ahead of consensus "due to proprietary bottom up modeling" that suggests consensus continues to underestimate the impact of a mix shift toward higher priced phones "even as we now assume that Apple reduces prices somewhat in the high end."

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Hall warned that AAPL will have "material channel inventory" to clear in June in order to prepare for rollout of new products this fall, and has modeled just 1MM units of inventory build into the June quarter.

Unleashed, the Goldman analyst also reduced his ASP estimate for the June quarter by 2.3% due to above-average forecast inventory burn of 6.0 million units.

There was some good news: the Goldman analyst said that while replacement rates continue to decline in our model, the growing installed base provides support for the Y/Y growth in replacement shipments. We estimate that the primary installed base, made up of only first-hand iPhone owners, stands at 631m units in FQ1’18 and is growing strongly at 12% Y/Y.

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Goldman's conclusion:

iPhone demand expectations for March and June are already weak but we believe that early CQ1 demand indications suggest even lower actual numbers than consensus is modeling. We are slightly reducing our March unit expectation and make a larger reduction in our June quarter unit and ASP forecast. We now model 1m units of inventory build into June which is atypical. This leaves Apple with material channel inventory to clear in June to prepare for the launch of new products this Fall. We also are trimming our replacement rate expectations looking forward in response to what has been weak replacement consumer behavior this cycle. We reduce our March and June QTR units by 1.7m and 3.2m to 53.0m and 40.3m units respectively. Due to an above average forecast inventory burn of 6.0m units in the June QTR we are also reducing our ASP forecast for that QTR by 2.3%. Looking forward we are also reducing replacement rate expectations which brings our FY19 and FY20 unit forecasts down by 4.0% and 1.8% respectively to 224m and 223m units.

Finally, Hall also cut his Neutral-rated Apple price target by $2 to $159, the second lowest on the Street, which has a median PT $195. Apple stock was modestly lower on the news.

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