To say the last few months have been tough ones for Apple Inc. (AAPL) investors would be an understatement. Apple stock is down 24% from its June peak, mostly on concerns that sales of the once wildly popular iPhone are finally starting to slow down as the total addressable smartphone market is nearing saturation.
What if, however, many of the assumptions regarding a smartphone headwind — and an iPhone headwind in particular — were wrong?
As it turns out, this may well be the case. While there’s no denying Apple will run out of new and repeat customers sooner or later, in retrospect, many of the assumptions about waning iPhone sales that have proven to be such a drag on the Apple stock price of late are just that … assumptions. New data suggests Apple may be doing well exactly where it needed to do well.
Pessimism Becomes Contagious
It’s not exactly clear who started the most recent round of whispers that sales of the iPhone 6s were not going as well as hoped, but Pacific Crest was one of the earliest, and seems to have gotten that ball rolling in early November by observing that inventories of the device were building shortly after the phone debuted.
The market was more than willing to take that ball and run with it.
Take Credit Suisse, for instance. Just a few days after Pacific Crest floated the idea, Credit Suisse analyst Kulbinder Garcha opined:
“We reduce our iPhone estimates for CY16 to 222mn from 242mn and introduce CY17 unit estimates of 235mn (6% growth y/y). We believe such adjustments reflect a more subdued launch around the iPhone 6s/6s Plus in terms of uptake.”
Garcha subsequently lowered his full-year profit outlook from $10.40 per share of AAPL stock to $9.81.
That rhetoric has been echoing ever since, and has been well reflected in a falling Apple stock price. AAPL shares, even with a respectable rebound effort this week, are down nearly 20% from the point in time when Pacific Crest hinted the iPhone was losing its marketing luster.
It’s time to rethink those theories, however; the pessimists may have overshot just how bad things could get.
On the Other Hand …
Perhaps things aren’t quite so bad for Apple after all, as recent demand from China — the market that’s been well-defined as a growth opportunity for Apple since the middle of last year — is surprisingly better than it has been elsewhere.
According to data from the China Academy of Telecommunication Research interpreted by Bloomberg, 24.3 million non-Android smartphones were shipped within China during the fourth quarter. While at least some of these phones could have been powered by operating systems other than Apple iOS, the consensus is that a significant portion of them were Apple devices.
The implication is simple — the iPhone was a big hit in China last quarter, even though most of the analyst chatter here in the U.S. was pessimistic.
For perspective, during the quarter ending in September, sales of Apple devices in China soared to $12.5 billion; iPhone sales grew 87%. Even more compelling is the fact that half of China’s iPhone buyers during the calendar third quarter were first-time buyers.
The company doesn’t detail its iPhone sales breakdown by country or region, but we do know it sold 48 million iPhones a quarter ago … the same quarter Apple generated $51.5 billion in sales. The numbers suggest Chinese iPhone sales on the order of 11 million to 12 million in calendar Q3.
Point being, even if only half of the 24.3 million non-Android smartphones shipped in China last quarter were iPhones (and that’s an exceedingly low supposition), we’re still talking about a very big quarter for China the quarter after the device was launched.
Bottom Line for Apple Stock
Only time will really tell if all the nay-saying of late was on target or not. But, the China Academy of Telecommunication Research merits a key point being made about all of the new doubts from the analyst community as a whole … none of them ever really knew how many iPhones had been planned, so any production cuts in the meantime still didn’t offer any true insight about how many iPhones would be sold (or not sold) last quarter.
As for what this may mean to current and prospective owners of Apple stock, Sanford C Bernstein analyst Alberto Moel said it best and simplest by explaining “Consensus is not pricing in any major blowout in Q4 for Apple, so this would be counter to the current investor sentiment.”
Apple still has challenges ahead, but for right now, thanks to China, the iPhone may not be as big of a challenge as recently assumed.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
