Apple: No need to panic, says Mark Hibben

The media, according to one of Seeking Alpha's better contributors, has got chipmaker TSMC's guidance all wrong.

From a piece Hibben posted Friday:

Over the past few years, I've become accustomed to a seasonal downturn in Apple's share price that roughly correlates with the seasonal downturn in iPhone sales. The weakest period for iPhone sales typically is in the April-September time frame. As can be seen in the chart [below], Apple's share price often suffers sharp declines in the same period.

seasonally negative coverage

Click to enlarge. 

This year, the coverage has turned negative once again, but with some subtle differences. The attacks on Apple have become more oblique but seemingly more effective. As I write, Apple is in a steep sell-off that started last week, when ASML Holding (ASML) reported earnings. ASML is a supplier of lithography equipment for chip manufacturers, and the first seriously negative report of the season concerned ASML, Apple, and Apple's semiconductor manufacturer, TSMC [Taiwan Semiconductor]...

The media largely ignored the fact that TSMC had achieved a process breakthrough in being first to 7 nm. Instead, the media focused on TSMC's supposed negative guidance, as exemplified in Bloomberg's “Chipmakers' Rout Widens After TSMC Ignites Smartphone Fears.”

But note that the forecast cut was only in the amount of year-over-year growth. TSMC wasn't trying to say that revenue would decline, or even that growth would be less than last year...

What about the “smartphone weakness” that was prominently featured in media reports? In his prepared remarks, co-CEO C. C. Wei was careful to refer to “continued softer demand from the smartphone segment” in his guidance for Q2. This was widely reported as a reference to Apple, but I think Wei's words were carefully chosen.

The fact that Bloomberg was so anxious to portray TSMC's guidance as a negative, and then lay this at the feet of iPhone X, should be deeply disturbing to any objective observer. There simply was no basis for the inference that has been widely made that TSMC's results and guidance foretell a steep decline in iPhone sales.

TSMC's revenue in Q1 grew by 12.7% y/y to $8.459 billion. TSMC's revenue guidance for Q2 called for revenue growth of 11% y/y at the midpoint of the revenue range of $7.8-7.9 billion. How does this guidance translate into a sharp decline in iPhone X sales? I don't know.

My take: If Hibben is right about the iPhone X, nearly every other commentator must be wrong.

14 Comments

  1. Fred Stein said:
    Thanks Philip and David for the tipranks.I like Mark. He really digs in.

    Many of the fear mongers just repeat someone else’s story, which is usually a rumor or inferences based on partial data.

    Even if Mark is wrong and the others are right, the downside is already priced in.

    2
    April 28, 2018
  2. Robert Paul Leitao said:
    TSMC’s quarterly report and forward guidance are just one set of data points. During Apple’s Q1 conference call in response to a question from Katy Huberty, Luca Maestri stated Apple placed the entirety of its iPhone channel fill in the December-ending period and this would impact reported unit sales in the March quarter. He also stated, in the context of guidance, the company expects an acceleration of sell-through as the company makes adjustments to channel inventory in the March quarter.

    In other words, “sell-through” to customers is likely to have been higher in the March quarter than “sell-in” to the global channel. Apple reports unit sales on a “sell-in” basis.

    Reported unit sales will be moderated by channel adjustments in the March period. The question on forward guidance for the June quarter is how much Apple is planning to further reduce supply during the period and whether or not, having achieved supply/demand equilibrium early in the model year, reported sell-through will come close to sell-in in the June quarter.

    Mr. Maestri also stated the company expected “the overall ASPs for iPhone in Q2 will naturally decline sequentially by a higher percentage than we have experienced historically.” In other words, having reached channel supply demand for the iPhone X in the December quarter, ASPs would fall in the March quarter as the sell-in mix of phones would change in the March quarter.

    All of the above said, Mr. Maestri emphasized on the whole and in the context of March quarter guidance, aggregate revenue would rise in the first six months of the fiscal year by $17 billion to $19 billion.

    In my view, there is absolutely nothing in TSMC’s recent quarterly report and forward guidance that contradicts Apple’s previously provided guidance. In my view, the reported “continued weakness” in the smartphone market reported by TSMC relates exclusively to the company’s smartphone-related revenue in the context of the rate of growth in that sector compared to the company’s rate of growth as a whole.

    I watched TSMC’s webcast more than once and reviewed the transcript. I find it quite puzzling how any analyst could extrapolate the remarks of the company’s executives to conclude iPhone X unit sales will be surprisingly low in the June quarter.

    There is no doubt some price resistance to the iPhone X and Apple may adjust channel supply again in the June quarter on a forward basis which would reduce some demand for components.

    But more important than Apple’s reported “sell in” in the March and June quarters is the continued growth in the global base of device users. This includes “sell through” of new devices and the robust global market for pre-owned iPhones which is not reflected on Apple’s books.

    Once again, Services revenue is the best proxy for gauging growth in Apple’s global eco-system and iPhone unit sales are best viewed over multi-year periods.

    7
    April 28, 2018
  3. Doug Montgomery said:
    I think we all (Apple included) have underestimated how the free iPhone battery replacement offer would impact sales. They still haven’t caught up with enough supply to get replacement swaps done quickly and it certainly has pushed some new phone sales out a few more quarters. .

    2
    April 28, 2018

Leave a Reply