From the second of two Apple notes to Morgan Stanley clients that landed on my desktop Thursday:
Apple product builds and demand data suggest outperformance is likely in the June quarter. We believe Apple is outperforming June quarter guidance and consensus expectations despite component tightness. For example, our Greater China Research colleagues have revised June quarter iPhone builds 14% higher over the last 4 months, to 44.5M units (+6% Y/Y; Exhibit 8) vs. 39M builds estimated back in February 2021. If we assume the historical seasonal relationship between iPhone builds and iPhone shipments holds true in the June quarter (when Apple typically drains channel inventory) iPhone builds imply 44.3M iPhone shipments in C2Q21, 2% ahead of our recently raised 43.3M shipment forecast (Exhibit 9).
We believe the iPhone strength is a product of strong global demand for 5G devices, but also a function of a retail store footprint that is now fully re-opened, and Apple accelerating adoption of trade-in, financing and installment programs.
Apple’s recent iPhone outperformance in China is most notable, as we estimate iPhone shipments in China grew 35% Y/Y in the month of May vs. 37% Y/Y shipment declines for domestic Chinese smartphone vendors (Exhibit 25). In fact, we estimate iPhone shipments have grown faster than domestic smartphone vendor shipments in China each of the last 8 months except for March 2021. This has helped Apple gain smartphone installed base share in China for 9 consecutive months, reaching a 2-year high of 20.5% in May 2021 (Exhibit 20).
Similar to iPhone, iPad builds also show upward pressure to shipment estimates in the June quarter, where our Greater China Research colleagues forecast 16.8M iPad builds (+28% Y/Y), implying 17.6M iPad shipments, 14% ahead of our recently raised 15.5M June quarter iPad shipment estimate (Exhibit 12).
While AirPods are one product where we recently revised our June quarter shipment estimates lower, we’d note the iPhone and iPad represent 60% of Apple’s revenue vs. just 4% for AirPods. Lastly, through the end of May, the App Store is trending 3 points ahead of our +11% Y/Y June quarter growth forecast (Exhibit 30). Collectively, these data points give us confidence that Apple can outperform June quarter expectations, and we are now 1-2% ahead of consensus June quarter revenue and EPS estimates.
Maintains Overweight rating and (recently raised) $162 price target.
My take: This is one of those chart-heavy Morgan Stanley IT Hardware Data Tracker notes. Below: The iPhone’s market share growth in China…