Morgan Stanley sees no iPhone demand destruction, cuts estimates anyway

"We might be taking an overly conservative approach" -- Analyst Eric Woodring

From a note to Morgan clients that landed (a day late) on my desktop Thursday:

Having gotten the chance to more thoroughly digest the news from earlier this week that Hon Hai's Zhengzhou iPhone production ramp is 3-4 weeks behind schedule, we are reducing our Dec Q iPhone shipment estimate by another 3M units, to 75.5M (- 11% Y/Y), while keeping our March Q iPhone shipment estimate of 56.5M units unchanged, implying none of the incremental Dec Q shortfall is deferred to the March Q (more details below).

While we might be taking an overly conservative approach given 1) our Greater China Hardware team (led by Sharon Shih) estimates just a 1-2M unit incremental shortfall from the slower iPhone production ramp, 2) our prior iPhone shipment forecast was already 3M units below what iPhone builds implied in the Dec Q, and 3) we still think its more likely iPhone demand is deferred vs. destroyed, we also believe more thoroughly de-risking estimates today is the prudent decision considering the uncertainty of the production situation in China.

As a result, we now forecast Dec Q revenue of $120.3B, 3% below consensus, and EPS of $1.88, 6% below consensus, and continue to closely track supply and demand related data sets to help us better gauge the setup into early 2023.

Maintains Overweight rating and $175 price target.

My take: Woodring, still a relatively green analyst, wants it both ways. On one hand, he says demand will be deferred, not destroyed. In other words, customers who ordered an iPhone 14 Pro before the end of the December quarter are willing to wait until after the start of the March quarter for delivery. On the other hand, he's not raising his March quarter iPhone estimates to reflect the added sales -- which puts him on record as marking the demand as destroyed.

See also: Talking heads want Apple to drop to $125 (video)

33 Comments

  1. David Emery said:
    “On the other hand, he’s not raising his March quarter iPhone estimates to reflect the added sales — which puts him on record as marking the demand as destroyed.”

    Math is hard, even for ANALysts who presumably have an MBA. 🙁 🙁

    5
    December 8, 2022
  2. Cy said:
    But are these guys worse than a CEO that doesn’t provide context to significant production problems with the biggest product, at the biggest production facility during the biggest quarter? These analysts have to do their job and they are provided nothing to work with.

    Cook has the information available to him, so it’s clearly a choice not provide transparency.

    The silence makes AAPL a target for any reporter or analyst that want to take a shot, which results in volatility.

    If things are actually this bad, I hope Cook would be providing incremental updates to soften the blow. But who knows. If results really are this bad and a profit warning is dropped near quarter end as well as a forecast cut for FQ2 during earnings, the environment has been created for a brutal response.

    Jobs was quiet but also unpredictable. Further, I think Jobs would have evolved his approach with social media becoming predominant, algo trading, reporters/analysts that are rewarded more for moving the market than being correct, etc. Cook is just predictably quiet and that gets exploited. That approach may be fine with larger macro stability, but I just don’t understand in the current environment.

    (And to be clear, Cook is one of the greatest corporate leaders in history. I just don’t understand the reluctance to be transparent at all times, at any cost.)

    1
    December 8, 2022
    • Daniel Epstein said:
      Before one jumps on Tim Cook for not commenting on the production / protest problems that have been widely reported one has to consider what level of issue becomes public discussion vs what the company can and should tell us. Transparency is important but how many comments a day would Tim Cook be releasing about a company with so many potentially important but maybe not material issues. What if the production issues are going to impact December sales but Currency headwinds ease and the numbers end up being less significant than the headlines? The news cycle benefits the news business and its audience more than the subjects involved. Historically Apple has not commented on these issues except in the Quarterly conference call. Even those comments have been blown out of context. Imagine the can of worms they would open up themselves to if they responded to news stories that have some truth in them but maybe not what you think.

      7
      December 8, 2022
      • Cy said:
        As I said, material impact to biggest product, biggest production facility, biggest quarter during broader macro-economic headwinds. That isn’t suggesting every story . . . it’s suggesting 1 in 1,000 stories.

        Jobs made statements occasionally and the unpredictability was healthy because Wall Street and the media knew they could get called out. I preferred the Jobs approach.

        Personally, I don’t think volatility is healthy for AAPL stock and long-term investors but I’m open for an accretive pro-volatility case.

        0
        December 8, 2022
      • Cy said:
        In re protest problems, I do think there is a principled case to be made about AAPL and the West’s manufacturing in Asia and the significant impact on global poverty. Based on where China is in its developing economic cycle, these are good jobs that people want. Departing China or protesting Xi would, in short order, lead to these same people plunging back into poverty while having no tangible impact on Xi.

        Accordingly, I think it’s a mistake to leave the uneducated and erroneous messaging to be ‘slave/forced labor’ when a more honest and AAPL-like message to be made.

        0
        December 8, 2022
    • Alan Blair said:
      Cook could just send all the pertinent information directly to the analysts – that would make their job a lot easier wouldn’t it. (Sorry, couldn’t resist the sarcasm.)

      2
      December 8, 2022
      • David Emery said:
        It’s not clear at all to me that analysts would draw the right/obvious conclusions no matter what Tim Cook says. We’ve seen that many times, when Apple has said something in quarterly results or other venues and the Talking Heads spin it into bad news. That’s because “bad news on AAPL sells clicks” and analysis & journalism has been replaced by revenue-seeking.

        ANALysts are supposed to be in the business of looking beyond the public statements (or lack thereof). Prior performance SHOULD BE CONSIDERED as predictors of future results. And Tim Cook has said MANY TIMES ‘do not draw conclusions about Apple’s complex supply chain from one vendor’s results,’ yet that’s what ANALysts continue to do.

        4
        December 8, 2022
      • Cy said:
        Well, you’d be surprised how often that happens.

        0
        December 8, 2022
  3. Timothy Smith said:
    During the first Iraq war, a friend complained that his furniture business was way down because people stayed home to watch the news at night. I said, “If someone needs a bed, they’ll just buy it later.” He said, “No. A lot of that business you don’t get back.” I told him I seriously doubted that.
    The following winter, we had a huge snow storm. The city was shut down for 3 days. He asked how my criminal law practice was doing. I said, “Terrible. People can’t commit crimes when they’re snowed in. And you don’t get that crime back.”
    I think a lot of iPhone 14 Pro will be deferred to the 15 Pro because of the camera.

    2
    December 8, 2022
    • Cy said:
      We’re still 9 mos from iPhone 15 and I’m not certain the majority of people have that much patience. However, at some point waiting becomes a logical decision.

      Overall, the group here is probably unusual in their desire to get their hands on the latest devices as well as upgrade every year. Presume the majority of 14 buyers are likely upgraded from iPhone X, 11 and 12 and likely with cell provider contracts expiring that provide incentives to upgrade. Generally think they’ll be happy taking the 14 . . . for now.

      0
      December 8, 2022
  4. Bart Yee said:
    @Cy Cook / Apple has already stated Apple was/is having supply issues related to Covid lockdown disruptions in Foxconn’s Zhengzhou. Apple clearly stated:

    “We continue to see strong demand for iPhone 14 Pro and iPhone 14 Pro Max models. However, we now expect lower iPhone 14 Pro and iPhone 14 Pro Max shipments than we previously anticipated and customers will experience longer wait times to receive their new products.

    We are working closely with our supplier to return to normal production levels while ensuring the health and safety of every worker.”

    The specific #’s of iPhone 14 Pro models shortage was/is/will be fluid depending on the mitigation steps Foxconn was successfully able to do vs Chinese government lockdowns. Foxconn AND Local Chinese authorities F’ed up pretty badly in November. Apple likely had stern discussions / directives with Foxconn about its handling of labor issues. The populist protests against lockdowns have now created an almost unprecedented relaxation of Chinese Covid policies and restrictions. Foxconn Zhengzhou is rapidly ramping back up to address existing and forthcoming iPhone 14 Pro orders. Any delayed order fulfillment is now being aggressively addressed, maybe production being pushed beyond even 100% utilization eventually.

    Now through all of the above and more, what do you expect Cook to say? Something like this?

    “We’re up, we’re down, we’ll be late but we’re working as diligently as possible to safely attempt to fill the iPhone order demand as soon as possible, but we still anticipate delays we cannot entirely control because of strong demand. For our products. We are gratified by the continued demand and will do our best to get your order fulfilled.”

    Remember Cook / Apple said no more iPhone unit numbers reporting? No guidance because of matters outside of Apple’s direct control affecting supply and demand? Focus on revenues of each segment of our business? Well, aside from the difficulties of giving / predicting numbers of orders filled while you’re trying to fill as many as possible before year end, what number is accurate from week to week??

    IMO, any CEO giving out week to week stats is micromanaging his own PR. It’s not productive, it’s actually creating more confusion as numbers shift constantly, and it reveals much more than is needed. Why? Because the end result is the bottom line. A revenue and / or profit shortfall is “implied” by the Apple Warning of Nov. 6, but how much and how well mitigated is a rapidly moving target.

    While important, as Cook said, quit counting iPhones and focus on our revenues. If consensus revenue estimates were muted at $126B, a small +1.7% increase, and now they’re dropped to $120B, (-3.0%) due to the worst iPhone supply issue and macroeconomic challenges to face Apple yet, then that’s what Apple is facing, maybe. Since no specific revenue target was given, no revenue shortfall can be specifically declared with 3 more weeks to go. Apple could surprise everyone or fall in line with revised estimates.

    Sure, Apple is subject to analysts attacks, speculation, and their various estimates which create volatility (another non-controllable factor for Apple), but Apple is doing all they can to mitigate the situation as best they can. Trust the process, trust Cook to know what messaging to provide.

    6
    December 8, 2022
    • Cy said:
      @Bart . . . AAPL’s release summarized events but no impact. It leaves the speculators and manipulators plenty of space work, which is damaging to investors. I don’t agree with waiting for a massive positive or negative surprise at earnings.

      The interruption, plans to recover, and some progress against those plans are now historical events. Specifics and on-going updates aren’t required. More to say ‘production was down ~XX% in Nov but we expect to make ~XX% back in Dec and the residual in Jan. We’ve seen no tangible impact to demand’. Easy enough.

      0
      December 8, 2022
      • Bart Yee said:
        “Specifics and on-going updates aren’t required. More to say ‘production was down ~XX% in Nov but we expect to make ~XX% back in Dec and the residual in Jan….”

        Isn’t that what Cook has already said?

        Essentially “iPhone production has been affected and reduced. We are doing all we can to restore production fully as quickly and as safely as possible. Expect delays in order fulfillment (possibly beyond year end).

        In Late October before the lockdowns, Cook said “We’re constrained right now on the 14 Pro and Pro Max and have been from the day we launched. And so obviously we’re chasing supply there and trying to get as much supply as we can to solve the demand.”

        As you said, “specifics aren’t required”.

        1
        December 8, 2022
        • Cy said:
          @ Bart . . . from Cook’s statement we can surmise production was between 0% and 99% of plan for an unknown timeframe. Similarly, we know nothing about recovery other than they will at some point.

          0
          December 8, 2022
  5. Robert Paul Leitao said:
    Most consumers buy a new iPhone when they determine they need and/or desire a new iPhone for performance reasons and the obsolescence of their current handset. Additionally, much demand is driven by generous carrier subsidies at this time to move consumers to 5G handsets. If Apple’s fiscal quarter closed at the end of January instead of December, there would be far fewer headlines on supply shortages at this time.

    4
    December 8, 2022
    • Bart Yee said:
      Agree, we’re still seeing a ton of carrier ads touting iPhone 14 Pros almost given away with switching, upgrading, or other promotional options. Either they still have inventory or they have the same delivery promises as Apple. The Carriera still have their own revenue / sales targets to hit by year end and they’ve shown no let up in trying to lure customers to them with huge iPhone incentives. Not so much with Samsung product advertising it seems to me.

      1
      December 8, 2022
  6. Bart Yee said:
    I will note, despite improved conditions at Zhengzhou, lifted Covid lockdowns, and now relaxed Chinese Covid restrictions and requirements, my local SoCal region delivery times have slipped to January 3, a week later. In-Apple store availability has dipped to 1-2 stores/12 for just a few 14 Pro models, and NO Pro Max units available presently. No idea about carrier stores, Best Buy / Walmart / Target, Costco or Sam’s Club inventories.

    My interpretation is, despite ever increasing levels of supply, demand is accelerating as we near Christmas. As Cook mentioned in past parts constrained earnings “we don’t know where the demand (limits) are because we couldn’t test them with enough supply.” And if demand slips further into January, to me it means Apple people want their iPhone 14 Pro’s and are willing to wait for them.

    A potential added effect is, I suspect, other Apple products (a Watch (Ultra), AirPods Pro 2, AirTags, etc.) could end up as stocking stuffers for Christmas while the iPhone is on order. IMO, at least the “US Apple consumer”, despite the macroeconomic beating this year, wants to spend something positive this year and see what come next as inflation is being fought. They’ve cut back in other areas so the personal items they may treat themselves to.

    2
    December 8, 2022
  7. Bart Yee said:
    A couple of other things:

    The dollar has fallen against other currencies since November, easing some of the anticipated foreign exchange headwinds.

    Maybe lost in all this is increased average sale prices as Pro models are sought after more than the iPhone 14 base and Plus, leading to “favorable mix” revenue situation. I’ll suggest previous ASP were around $825. In Q3, Apple shipped 49-53M iPhones depending on which research to be believed. With $42.6B iPhone revenue, that’s $870-804 ASP. With a Pro biased mix (whether by Apple marketing design or user self-upsell), I would posit ASP north of $925 for this quarter. That will somewhat offset lower supply number from a revenue perspective.

    And while all analysts eyes are on iPhones, I believe the Watch Ultra, Watch 8, and AirPods Pro 2 will boost Wearables by double digits over a robust compare.

    4
    December 8, 2022
  8. Gregg Thurman said:
    It seems to me that Apple is favoring carrier deliveries over its owned outlets. I think this is a contractual obligation that individual consumers don’t have

    Think about it, carrier ads touting near free iPhone 14 Pros when switching have not abated, and there are no reports of switchers not getting their iPhone.

    If I were a Verizon customer (I am) and I reeeeally wanted the iPhone 14 Pro TODAY, I’d switch to T-Mobile or ATT, and get it with a steep discount to boot. How can T-Mobile (or Verizon in reverse transaction) continue to honor these advertised specials if they didn’t have a secure supply? I don’t think they could, hence my feeling that the carriers are being given delivery priority.

    5
    December 8, 2022

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