Toni Sacconaghi: ‘Have we seen this movie before?’

Bernstein’s top Apple analyst sees striking similarities between the iPhone X/8 and iPhone 6S cycles.

From a note to clients—Sacconaghi’s second in four days—that landed in my inbox Monday:

In recent months, the pattern of Apple’s share price performance has been very similar to the early months of 2016, during Apple’s difficult iPhone 6S cycle. The parallels in stock performance between April 2016 and 2018 have been particularly striking (see Exhibit 3!).

The concern is that while iPhone expectations have come in considerably among investors over the last two weeks, they also did during the iPhone 6S cycle… but FY Q2 results and FY Q3 guidance still disappointed, and the stock underperformed materially following Q2 earnings. The current backdrop is reminiscent of 2016: supply chain reports have been unencouraging, and channel inventory was unusually elevated entering FY Q2 (and likely still is). Moreover, Apple’s relative valuation is actually higher (0.80x vs. 0.66x) than where it was at this point in the 6S cycle.

So, will history repeat itself? Bulls would argue that Apple’s recent underperformance has already priced in iPhone weakness, and Apple still possesses two wildcards to help FY18 earnings, including (1) increased buybacks, and (2) a potential new product announcement, e.g. the iPhone SE 2. Bears would argue that share repurchases and the impact of SE are not enough to offset a weak iPhone X/8 cycle, and that the iPhone business is structurally challenged – delivering flattish unit growth for the third consecutive year.

On net, we see risk-reward going into FQ2 earnings as neutral to slightly negative.

Maintains Market-Perform rating and $170 price target.

My take: Sacconaghi has a flair for the dramatic, posting a second negative note the day before earnings. Despite the sour note he struck, Apple closed up 1.8%.

See also: Toni Sacconaghi: ‘iPhone weakness vs. the buyback bazooka’

10 Comments

  1. Robert Paul Leitao said:
    The iPhone business is in no way structurally challenged and there’s also no real correlation between the 6s cycle and the iPhone X cycle.

    The global smartphone market is in a mature market phase and Apple is exhibiting a remarkable level of pricing control as the company seeks to advance the eco-system through innovation and new product features. The Phone X and its new technologies are a platform for handset development for the next few years.

    The iPhone 6s followed the original iPhone 6 into the market and the iPhone 6 represented Apple’s first larger-screen smartphone. There was pent-up demand for a larger-screen iPhone on a regional basis and it created a unit sales spike particularly in Greater China. In FY2015 Greater China’s revenue rose by nearly 85% and the region represented just over 25% of the company’s reported revenue.

    Apple operates its business on a geographic basis and the extraordinary success of the original iPhone 6 in one particular region does not create a basis for Mr. Sacconaghi’s thesis in this particular note.

    There is obviously some price resistance to the iPhone X. This price resistance has moderated demand for this new class of iPhone in the first year of release and Apple’s pricing of the iPhone X was necessary to bring a more advanced class of smartphone to market. Price resistance will soften as the iPhone X’s advances move further down the product line over the next few years.

    1
    May 1, 2018
  2. Gregg Thurman said:
    “My take: Sacconaghi has a flair for the dramatic”

    Sacconaghi has a flair for stupid.

    What part of “market saturation” doesn’t Sacconaghi understand?

    In the December quarter of C2015, C2016 and C2017 iPhone unit sales have been FLAT, and worldwide industry sales have declined (with more to come). Yet iPhone REVENUE has increased dramatically, with iPhone’s most expensive model (iPhone X) outselling all other iPhone models every week since launch to February earnings report/conference call.

    Revenue guidance for the following March quarter was given one month into said quarter, so Apple already had 1/3 of the quarter’s results in hand.

    Component orders for the remaining 2 months of the quarter had already been placed (most likely in November at the latest). That would make rumors of order cut backs in March and April a June quarter issue, not related to March quarter results.

    As for the June quarter, in the saturated markets of C2016 and C2017, iPhone unit sales declined an average 16% (QoQ), so declining orders should be expected. Certainly they should not have come as a surprise.

    Why is it that amateur analysts can see historical trends that so-called “Pros”, with all the resources at their disposal, cannot? There can only be two answers to that quest stion, neither of which are flattering. The first is that WS analysts are stupid, or worse, they are intentionally trying to mislead retail investors.

    Henry Blodgett was an extreme example, but not the only one, of WS duplicity. Since the dot.com bubble burst I have viewed WS analysis/recommendations with a severely jaundiced eye, and rightly so.

    1
    May 1, 2018
    • Michael Thompson said:
      I’m afraid that it’s sonething far more nefarious than stupid.

      0
      May 1, 2018

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