From a 21-page note to clients by analyst Steve Milunovich that landed in my inbox with a thump Tuesday:
Although we continue to forecast double-digit iPhone growth in F18, there are worries… China has gone from being the primary source of growth to a drag. The region was down 17% in F16 revenue, and Gartner data shows smartphone units were down 18%. Apple lost 10 points of market share in the country in F16. Our surveys and channel checks have indicated more tepid demand for the iPhone 7 in China than in the US. Our most recent UBS Evidence Lab Smartphone survey showed that interest in the iPhone 7 is below that of the 6s and a large increase in the number of Apple users with “no plan” of what phone to upgrade to. Also, UBS analyst Jinjin Wang’s channel checks have been soft.
We doubt China will grow YoY in Dec. Management noted on the last call that Dec performance in China will be “significantly better than Sep on a year-over-year basis.” Greater China was down 30% YoY in Sep, making that comment somewhat ambiguous. The region was up 10% in Dec 2016 in unit terms, potentially creating a difficult compare. We now estimate China iPhone units will be down 7% this year, which implies the rest of world must grow 8% to reach our 4% iPhone growth goal.
Rating: Buy. Price target: $127.
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