Analyst Katy Huberty’s says “peer multiple contraction” made her do it.
From a note to clients that landed on my desktop Thursday.
On Apple’s April 30th earnings call, CEO Tim Cook noted that the November-December period was likely to be the trough in iPhone demand in China, following an improvement in performance during the March quarter helped by iPhone price cuts, VAT tax rollbacks, increased financing options and better consumer confidence. Data from push-messaging service provider Jigaung shows that the improvement in iPhone demand likely persisted through April, where Apple gained over 175bps of Chinese smartphone installed base share Y/Y. However, the increasingly tough trade rhetoric and actions recently taken by US and Chinese authorities make it less likely that this trend will continue into May/June. Given the risk of further restrictive trade measures, Katy answers investors’ top questions and highlights her expectation for shares to remain choppy, with a near term floor around $160. Katy’s estimates are unchanged but peer multiple contraction drives her [sum of the parts]-driven PT to $231 (from $240).
From the Q&A:
Is there a possibility that the Chinese government would retaliate by including the iPhone in tariffs the Chinese government places on US imports? On May 13th, it was reported that China would be raising tariffs on $60B worth of US imports, including “other telephones using cellular network or wifi”. We don’t see this as a meaningful risk because tariffs are levied at the port where products enter the country, and iPhones are currently produced within Chinese borders. More likely in our view is that the government could place an informal ban on purchasing certain products as it has done in the past for parts of the market (such as for government officials several years ago), which could have a negative impact on iPhone demand. Even in the absence of a formal, government issued ban, consumers may continue to protest the trade conflict by purchasing domestic branded smartphones at the expense of iPhone.
What does this all mean? How do you think about bear case EPS and the near term floor for the stock? After peaking at $210 in early May, Apple shares have retreated back to the $180 range following the escalation of US/China trade rhetoric. The situation remains extremely fluid and we admit that quantifying the overall impact of geopolitical tensions on Apple is difficult given the unknowns around timing, demand impact, retaliatory measures, exclusions, etc. Near term, the greatest risk to Apple is that Chinese consumers meaningfully slow their purchases of Apple products, which would likely cause another round of estimate cuts.
Maintains Overweight rating, cuts price target to $231 from $240.
My take: Peer pressure.