J.P. Morgan: First iPhone supply chain decline since Nov. 2016

From a note to clients by analyst Samik Chatterjee that landed on my desktop Friday:

  • Our iPhone Supplier Tracker decelerated further in December, and marked the first y/y decline since November 2016. Aggregate revenues for the suppliers in our tracker declined by -4% y/y in December (vs. +9% in November, and +17% in October), marking the first y/y decline since November 2016.
  • Quarterly supplier revenue trend decelerates as well in C4Q18; points to continued iPhone revenue decline in C1Q19. On a quarterly basis, our iPhone Supplier Tracker decelerated to +7% y/y in C4Q18 from +17% in C3Q18. The strong historical correlation between our iPhone Supplier Tracker and iPhone revenue growth (see Figure 3) leads us to conclude that the deceleration in supplier revenue growth points to continued iPhone revenue declines in C1Q19 (F2Q).
  • 2019 iPhone models unlikely to involve major upgrades; 2020 refresh could drive AR/VR leadership. Based on latest feedback from the Apple supply chain, we believe 2019 iPhone models are unlikely to involve significant upgrades, except for OLED/LCD models moving to triple/dual camera configurations. While still uncertain, we now believe the adoption of world-facing 3D sensing is less likely in 2019. In 2020, we expect a more material refresh, including adoption of world-facing 3D sensing, substantially greater support for AR/VR applications, inclusion of 5G modems, and a material change on display/casing form factor.
  • The most frequent question from investors is relative to state of the China smartphone market and Apple’s position in it. Following recent announcements from Apple and Samsung, the most frequent investor question we have received is relative to the state of the China smartphone market. Our latest checks indicate the smartphone market in China could be down as much as -20% y/y in C4Q18, which would imply that although Apple is losing share due to a combination of increased competitiveness of local brands and negative sentiment on US companies, share loss is unlikely the primary driver of the weakness for Apple in China.

Maintains Overweight rating and $228 price target. 

Cue the bar graphs:
supply chain decline
Click to enlarge.

J.P. Morgan’s methodology: Our monthly tracker aggregates revenue from the most relevant Taiwanese Suppliers with meaningful exposure to Apple, such as Catcher, Genius, Hon Hai, Largan, Pegatron, TPK, Win Semi and Wistron.

My take: Not clear to me how Chatterjee untangles the iPhone supply chain decline from the broader smartphone slowdown.

6 Comments

  1. David Drinkwater said:

    I do not understand this guy’s math. I’ll parse just one example:

    Our iPhone Supplier Tracker decelerated further in December, and marked the first y/y decline since November 2016. Aggregate revenues for the suppliers in our tracker declined by -4% y/y in December (vs. +9% in November, and +17% in October), marking the first y/y decline since November 2016.

    1) maybe this is looking at individual months, in which case December 2018 is the 25th month since November 2016, but if this is the first December to see decline since 2016, there’s only been two of them, so its not very remarkable.

    2) a 4% decline after two months of 17% and 9% growth still seems like growth to me. It only implies that Apple slightly overbuilt in October and November, but the average of these three numbers is still +7%.

    3) All of this, of course, has to be adjusted/weighted by the actual size of expenditure in each of these months/quarters. I would expect builds in October to be much bigger than builds in December, since by December, it is already to late to make Christmas. 17% of 200 is 34. 4% of 50 is 2. 2 and 34 are barely comparable, except to sat that 2 is ~6% of 34.

    All the numbers that he offers may be factual, but they are still meaningless.

    1
    January 11, 2019
  2. David Emery said:

    This is the line I jut don’t understand:

    “Our latest checks indicate the smartphone market in China could be down as much as -20% y/y in C4Q18, which would imply that although Apple is losing share due to a combination of increased competitiveness of local brands and negative sentiment on US companies, share loss is unlikely the primary driver of the weakness for Apple in China.”

    If Apple’s decline in China is not due to an overall 20% drop, then -what is it due to-?

    1
    January 11, 2019
  3. Aaron Belich said:

    Isnt this just Mr. Chatterjee getting his narrative out their restating what Apple already provided guidance for, except with fantastic fabricated stats?

    2
    January 11, 2019
  4. Rick Raphael said:

    English translation: Apple’s doing swell, and we expect a 48% increase in share value despite the smartphone market going to hell in a hand basket.

    2
    January 11, 2019
  5. Gregg Thurman said:

    Apple may no longer provide units sold by region, but it will provide revenue by region, and that is far more important. Importantly you CAN make YoY comparisons on that.

    2
    January 11, 2019

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