apple huberty target 180
10 months ago
Published October 13, 2021 by

Katy Huberty: 'We are buyers of any near-term AAPL weakness'

From a note to Morgan Stanley clients that landed on my desktop Wednesday:

What happened? Earlier [Tuesday] evening, Bloomberg reported that Apple is "likely" to cut its iPhone 13 build/production targets for C2H21 by as many as 10 million units because of prolonged chip shortages at Broadcom and Texas Instruments (both covered by Joe Moore). Apple, Broadcom, and Texas Instruments have not publicly commented on this report.

Our view: While we have not specifically heard of material iPhone production bottlenecks due to semiconductor shortages at AVGO or TXN, broader supply tightness continues to be a real issue across a number of end markets.

As we highlighted last week, the most significant iPhone production bottleneck ties to a shortage of camera modules for the iPhone 13 Pro/Pro Max due to low utilization rates at a Sharp factory in southern Vietnam impacted by COVID-19 related workforce limitations.

Regardless of whether supply challenges become more pronounced near-term, we'd remind investors of three data points that support a 'buy the dip' view on the back of supply-driven disruption.

First, Apple's significant revenue outperformance - 7% upside vs. consensus forecasts YTD - is consistent with our supplier checks that Apple receives preferential treatment during periods of supply tightness. As a result, if Apple can't meet near-term demand, the shortfall is likely to be even greater at competitors, creating an opportunity for share gains.

Second, Apple enjoys market-leading customer retention/loyalty (1) such that any delay in production just pushes iPhone sales into future quarters. In other words, demand isn't perishable and any supply shortage shouldn't materially impact valuation.

Lastly, during the most recent period of material supply shortages in the early days of COVID-19 factory shut downs, FY20 consensus revenue estimates were revised lower by 9% (FY20 EPS was cut by 12%) from peak to trough, yet by fiscal year end, Apple's FY20 consensus revenue and EPS estimates were actually slightly higher than where they started the year (Exhibit 2), further supporting the view that demand isn't perishable. This was despite a delayed iPhone 12 launch that also had the impact of shifting the revenue contribution from new iPhones into the following fiscal year.

Maintains Overweight rating and $168 price target.

My take: From Katy's lips to the Street's ears. Key point...

"...if Apple can't meet near-term demand, the shortfall is likely to be even greater at competitors, creating an opportunity for share gains."

 

8 Comments

  1. David Emery said:
    On target for all 3 reasons. Collectively these throw the ‘bovine effluent flag’ at any assertion shortages will impact Apple more than the industry as a whole (which is implied by the “slashed production” headline.)

    2
    October 13, 2021
  2. Jonny T said:
    Well, the journalists writing the headlines inferring that Apple is slashing production and the share price is therefore plummeting, sure as hell aren’t buying on weakness. Bad luck them.

    Don’t sell that share PED!

    6
    October 13, 2021
  3. Manfred Schwencke said:
    “Don’t sell that share PED!

    I think it’s four shares since the split, unless he sold the other three….“

    Good point! Unfortunately, there has not been a shareholder meeting since PED bought his share, at least no face-to-face one! I recall that was the primary reason to become a shareholder!
    Looking forward to the next one, hopefully 2022! I woulf definately like to see Tim Cook in person!

    3
    October 13, 2021
  4. Fred Stein said:
    Love Katy. Love ‘Demand isn’t perishable’. Up there with ‘success is not illegal’.

    5
    October 13, 2021
  5. Robert Paul Leitao said:
    The sell-off is a buy opportunity for investors with a long-term perspective. It might take a week or two longer for Apple to reach supply-demand equilibrium on iPhone 13 series handsets in the March quarter. We’ve been here before. The scenery isn’t new. The destination remains the same. Anyone who desires to purchase an iPhone 13 series handset will have the opportunity to purchase one.

    3
    October 13, 2021
  6. Daniel Epstein said:
    My thoughts about how people use language and the scale it implies are complex on this topic. And headlines are the worst. Did Bloomberg say Apple Cut production or did they say cut production targets? The latter. And don’t get me started with “likely” thrown in. Just using the phrase “cut production” seems to make the market shiver. If they had said suppliers were unable to keep up with Apple’s demand then we might have had a different reaction from the market. As some have pointed out the order for this year was already 20% higher than the previous year so someone saying they won’t meet target doesn’t mean it is a bad result for the companies sales. I still think the real truth will come out after Apple reports not from these so called “scoops” People often use the most bombastic term to describe something which is relatively harmless. For Instance I hear Goldman Sachs had cut its GDP forecast for 2021 growth in the US from something like 5.7 annual to 5.6. Isn’t that really a trim? Or and adjustment. Yes the 2022 adjustment was from 4.4 to 4. Anyone care to ask how accurate they have been forecasting this? Even the 4% GDP growth is a very high number for the US. This is like people complaining the Iphone 14 doesn’t have a feature they want so they won’t buy it. Informed speculation maybe.

    1
    October 13, 2021

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