Apple's rare warning: What the analysts are saying

"An absolute gut punch for Apple in its most important holiday quarter." -- Wedbush's Daniel Ives

Excerpts from the notes I've seen. More as they come in.

Wamsi Mohan, BofA: Supply issues impact iPhone Pro/Max shipments. Our checks suggest that the Zhengzhou facility is running at about 50% utilization rate and aiming to ramp to 70% in the last two weeks of Nov and back to a full rate in Dec. We estimate a 5-6mn unit disruption in supply if the situation does not deteriorate further. We also view demand as partially perishable and not likely to drive upside in the March qtr. We reiterate Neutral on risk/reward balance, where lower consumer spending, weaker near- term services trajectory and headwind from a stronger dollar, are offset by potential new products (AR/VR) and services. Neutral. Target to $154 from $160. 

Erik Woodring, Morgan Stanley: An opportunity to 'buy the dip' emerges, but tracking fluid iPhone production situation remains key. While the renewal of COVID-19 restrictions at Hon Hai's (covered by Sharon Shih) primary Zhengzhou, China facility is negatively impacting iPhone 14 Pro and Pro Max production, we see this as a supply problem, not a demand problem, as iPhone 14 Pro and Pro Max channel inventory is below the target range and lead times have remained strong cycle-to-date. Said differently, we believe this situation equates to more of a deferral of iPhone demand than a destruction of demand, which does not change our OW thesis. As a result, we would be methodical buyers of the stock as it approaches 20x P/E – roughly 6.5x turns lower than its recent peak in August 2022 and in-line with its trailing 5 year average. Overweight. Target to $175 from $177. 

David Vogt, UBS: Apple discloses Covid lock downs to impact 14 Pro and Pro Max assembly. The confluence of Covid disruptions and solid demand for the high-end models will lead to longer wait times for customers to receive their products. While we have highlighted this risk based on our channel checks and analysis of UBS Evidence Lab data that showed an abnormal increase in wait times in the US, China and Europe, we believe the market has not fully reflected the disruptions in F1Q23 and FY23 expectations. Although we are not trimming our ests for the December quarter, we remain below the street for both revenue and EPS as our FY23 forecast reflects the supply chain challenges and softer Product demand in FY23. Buy. $185.

Melissa Fairbanks, Raymond James: Demand remains strong, but another covid-related setback. Over the weekend, Apple issued a press release indicating supply of the highest-end devices – iPhone 14 Pro and Pro Max – was being impacted by the most recent covid lockdowns at Foxconn’s Zhengzhou, China facility. Net, while disruption in the supply of Pro/Pro Max models would have a greater impact on ASP and revenue, our checks this morning suggest lead times have only extended by about a week for each model (so far) as compared to last Friday, and assuming production returns to normal this later month, we estimate the overall impact to results to be minimal for the December quarter, particularly against an already cautious outlook. Outperform. $185.

Tim Long, Barclays: AAPL Cuts Pro Units, and Checks Indicate Weakening Sell Through. We think 82M consensus iPhone estimate and 3% AAPL revenue growth estimate for Dec-Q are now too high. We are cutting 6M Pro units for Dec-Q and shifting 3M to March-Q, assuming some lost shipments will not recover. Local contacts believe that the shortfall will be 10M units, so our model still could prove aggressive. We are also reducing Dec-Q wearables revenue moderately as we hear AAPL cut 5M AirPods Pro on weak demand. Equal Weight. $144.

Daniel Ives, Wedbush: Zero Covid Policy in China Strikes Again for Apple. After battling the macro headwinds and delivering a strong September quarter/guidance in a stark contrast to the rest of Big Tech, this latest zero Covid situation is an absolute gut punch for Apple in its most important holiday quarter. With demand remaining firm into holiday season, we would estimate this negatively impacting roughly 3% of iPhone sales this quarter based on impacted China production/supply issues. If Zhengzhou remains at lower capacity the next few weeks, this would cause clear iPhone Pro shortages into the all-important Christmas time period especially in the US. While not the news any bull wants to hear from Apple, its a supply issue and related to China's zero Covid policy which is a very frustrating situation for Apple (and its investors) yet again but not demand driven. Outperform. $200. 

Amit Daryanani, Evercore: COVID Shutdowns Impact iPhone Production. It is unclear what exactly is meant by “significantly reduced capacity”, but if we assume 50% capacity for 7 days that would imply $3B in lost iPhone production or 4% of our forecasted iPhone revenue for the Dec-qtr. Net/Net: China’s Zero Covid policy continues to cause issues for manufacturing in the country, but the key thing to focus on is it is unlikely a short extension in iPhone lead times will cause anyone to leave the Apple ecosystem, so we view demand as deferred rather than lost. Any shutdowns should just lead to a longer than usual iPhone cycle and drive more revenue into the Mar-qtr. Outperform. $190.

Samik Chatterjee, J.P.Morgan: Thoughts on Implications of Apple’s Supply Announcement. Even though lead times have only expanded by an additional week as of now, it still implies that the company is going to be far from achieving supply-demand balance that it usually does every year with lead times dropping to a matter of days by the end of C4Q/F1Q. However, within the hardware portfolio, we see the demand destructions from supply pushouts the least for the iPhone, as consumers are willing to wait for delivery; and would expect the delayed shipments to push out into F2Q23 (March-end) or later quarters. Supply chain challenges have been frequent the last couple of years, and there is limited evidence that delays in shipping devices have had any impact on overall volumes for a product cycle (example: iPhone 12 or iPhone 13) over a multi-quarter period. Overweight. $200.

Martin Yang, Oppenheimer: Model Update on Reduced iPhone Capacity. On 11/06, Apple announced that COVID restrictions have impacted iPhone 14 Pro and Pro Max capacity out of its assembly facility in Zhengzhou, China. With reduced capacity, Apple expects lower Pro and Pro Max shipment. We lower our iPhone shipment assumption for F1Q23 (Dec. Q) by 3.5M units, impacting our F1Q23 EPS estimates by $0.06. We also assume that lost sales due to capacity reduction in F1Q23 will be fully recuperated by F2Q23; therefore, our FY23 annual estimates is little changed. Outperform. $190. 

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9 Comments

  1. Bart Yee said:
    Tim Long, Barclay said “We are also reducing Dec-Q wearables revenue moderately as we hear AAPL cut 5M AirPods Pro on weak demand.”

    First I’ve heard of this and no secondary sources reporting this issue. No supply constraints for AirPods because most built outside of China. Frankly, I think AirPods/Pro will likely be heavily discounted by retailers as potential loss leaders to pull in consumers. Consumers may gravitate towards AirPods as a stocking stuffer while awaiting delivery of their iPhone 14 Pro.

    3
    November 7, 2022
  2. Robert Paul Leitao said:
    Apple came out with a caution ahead of the news. They own the “spin.” This is a very responsible thing to do and the situation has a relatively small and short-term impact on the company’s revenue and profit performance. It’s a long quarter (14 weeks) and it’s possible much of the supply chain challenge might be resolved by December 31st. Because there are no intra-quarter catalysts for the share price at this time (absent an unexpected product announcement), the share price might be under a little pressure. In my view, any analyst that revises their Apple price target on this news may have been looking for an excuse. Again, this is my view. Your mileage may vary.

    7
    November 7, 2022
  3. Paul Brindze said:
    Meanwhile 30 min before close and we are actually up 50 cents for day. I really like how the market absorbed this news. Looks like we may be right at bottom of recent drop.

    1
    November 7, 2022
  4. Bart Yee said:
    FOMO is likely going to drive prospective iPhone 14 Pro seekers into hunt mode trying to see if ready inventory is ANYWHERE to be found. This will quickly deplete any onshore inventory and also lengthen and add to any wait times independent of supply constraints.

    I just checked the Apple Store App looking at SoCal. None of the Pro & Pro Max in any color and memory combo show available in all 10 nearest stores in LA, OC, Riverside and Ventura counties. Delivery is delayed to Dec. 8-14, 4-5 weeks out.

    Although carriers might consider reining in 14 Pro promotions because high demand usually supports prices, I doubt they will pull back because sales will slide to other carriers’ offering better terms. Will this crimp Black Friday and upcoming promotions – it could, especially if orders around the Thanksgiving period get stretched beyond Christmas.

    For Apple, it’s a double whammy because lower iPhone supply means lower sales in the quarter also leading to lower services purchases. Against a difficult compare iPhone and overall revenue could be reduced and growth less than the 3-5% anticipated or even flat (which would still be good IMO in this environment) or at worst down 1-2%, still a reasonable number.

    Like I said earlier, depends a lot on downgraded analysts’ revenue and iPhone expectations and the street accepting realistically that. Strong reasons for Apple to make this announcement today rather than after the quarter like Jan 2019.

    1
    November 7, 2022
  5. David Emery said:
    This should make the first quarter of 2023 bigger than expected, as the demand remains and gets filled after Christmas.

    4
    November 7, 2022
    • David Drinkwater said:
      I apologize in advance for channeling you thusly, David, but this is not an Apple problem or a demand problem:

      It is a suppLIAR problem.

      Demand delayed is indeed demand delayed, but it will still be demand delivered. As you suggest, March Quarter will be strong. Hell, for all we know, December quarter may still be strong. I do trust Apple to know their business, though.

      0
      November 8, 2022
  6. Gregg Thurman said:
    there is limited evidence that delays in shipping devices have had any [negative] impact on overall volumes for a product cycle

    I think Chatterjee summed it up quite well.

    Then there is Robert’s observation that there is 14 weeks this quarter.

    Then I’d like to add that this plant isn’t the only one that Foxconn operates in China, AND there is the plant in India. All of Foxconn’s plant have surplus capacity for just this sort of scenario.

    How much iPhone Pro production can Foxconn shift from the affected plant to other plants not so affected? I don’t know, but my feeling is that Apple warned more out of caution than a genuine fear of missing numbers.

    Looking at AAPL’s Closing print vs it’s After Hours trading range ($137.4599 – $145.4954) I’d say the market has shrugged this “warning” off.

    3
    November 7, 2022

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