"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.
Math is hard, even for ANALysts who presumably have an MBA. 🙁 🙁
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.)
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.
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.
Now you’re talking about PR. That’s fine, but a good bit of PR is to know when to NOT say something. If you even begin to acknowledge every moron with an opinion, all you’re really doing is giving them oxygen.
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.
“Well, you’d be surprised how often that happens.”
You’d be surprised at how little we’d be surprised….
“I just don’t understand the reluctance to be transparent at all times, at any cost.”
Not sure how long you’ve been following Apple, Cy, but I’ve been following it since 1984, when we bought our first Mac. And I’ve been following the stock since 1999, when Donna went to work for Apple and we started to buy the stock in earnest. I was also very much aware of AAPL during and following the Great Recession, when it’s P/EPS ratio dropped below 10 every 2-3 years – until buybacks and dividends started.
Giving out guidance did NOT stop the volatility. And ending guidance was a direct result of having to restate guidance as we entered into the Trump era and then into the Covid pandemic. Finally, the real issue now is that the Fed has lowered the boom on easy money, big time. I suspect part of the reason is they are taking advantage of the booming economy to “reload”, having literally used up all of their ammunition in the Great Recession when Congress sat on its posterior and, like now, descended into trench warfare.
Bottom line: There is Apple, and there is AAPL. Apple has taken great care of its long term investors with buybacks and dividends over the last decade. But it far more importantly has a business to run. That SHOULD be what every investor wants, but in this day and age of the Casino Market, many, many “investors” (really just gamblers) are only interested in a short term ROI.
AAPL as a company and the environment in which it operates is substantially different since even then.
I have no issue with full, limited, no guidance. Historically, I remember the problem with Cook’s revised guidance, as I remember the post-mortem at the time, was it’s substance. Job’s did a guidance revision once that was received much better. However, this situation is different – it’s a material interruption in AAPL’s operations.
Anyway, I agree AAPL has taken care of its investors long-term. Simultaneously, I believe there are many long-term investors that are being scarred by volatility and won’t be back to AAPL, which is not good for those that want to stick around.
Thanks for your reply. Respectfully, however, I can’t agree with you.
Since you’ve been with us that long, then you remember when a little downturn like this, or (182.94-142.36=) 40.58/182.94 or 22% off of the ATH, was just not that big a deal, compared to what it took to stay long back then. And compared to the absolute havoc being played with other tech stocks over the last year, that’s a very good relative result!
You also know that you’ve been hugely rewarded for sticking with Apple/AAPL over the years, including seeing your percentage ownership of Apple itself increase dramatically because of buybacks – which are still ongoing.
The same would be true of ANY truly long-term investor; they’ve been richly rewarded.
I feel, of course, for anyone who is forced to sell into the teeth of this selloff, as Donna and I had to do for years, being forced into retirement by the Great Recession. But we were selling at a P/E of 10, not a P/E of 23!
Finally, having been in AAPL long term, if one didn’t have to sell but one sold it anyway, then that’s on them, not on Apple.
Going from a market cap of $100B to $200B or $500B to $1T, investors are somewhat fungible. However, from $2T to $4T or $6T they are less so. That move will require current investors to allocate much greater portions of their portfolio to AAPL as well as many investors, likely entire new classes of investors, not currently in AAPL to buy-in.
Portfolio concentration and new investors will not be encouraged by a share price that drops 20-30% or thrashes +\- 5-10% in hours or days. I just don’t see $4 – $6T of hardcore, risk-tolerant, AAPL roller coaster loving capital. That range of market cap will require dramatic growth as well as managing the stock for greater stability (e.g., stronger dividend).
“That range of market cap will require dramatic growth as well as managing the stock for greater stability (e.g., stronger dividend).”
(1) Once net zero cash is reached, a much stronger dividend is in the cards. Again, something Robert Leitao and I agree on.
(2) Buybacks are a tangible if largely unacknowledged (even unknown) means of both rewarding long term investors and creating greater stability. You are new here, and so are missing the whole evolution of thought behind my stating that so firmly. As practiced by Apple, it literally is superior to dividends. Note that the average price Apple has paid to buy back its own stock over the last decade is about $50/share….
(3) Apple has, in the eyes of many, “defied gravity” for many, many years now, and yet continues to grow cash flow. Everything we know tells us that’s not going to stop for many years to come. Indeed, it is that cash flow growth that is essential to the success of Apple’s approach to buybacks. About 40% of Apple’s float has now been removed – in spite of continual granting of shares in the form of stock options. A share bought pre-buyback and held now has a “relative EPS” that’s (100/60=) 1.666X what it would have had without buybacks; i.e., it’s as if you actually bought 66.6% more AAPL when you bought those shares. And that’s going to increase until Apple finally reaches net zero cash – at which point all that cash will “shift” to dividend increases far into the future.
(4) As for “greater stability”, as the stock buybacks have continued, it is the “weak hands” and the short term profit speculators that have been selling their AAPL. That leaves more and more of a percentage of total stock left in the hands of long term investors. We can see evidence of this by looking at the split-adjusted market volume difference from before and after buybacks started a decade ago, which has steadily reduced to a fraction of what it was at the height of the Great Recession. I’m convinced that is why you see Apple so very resistant to being pulled down into the gutter like so many tech stocks over the last year – including mighty Microsoft and Amazon. Indeed, Apple has actually helped to buoy those stocks, many of which remain overpriced, IMHO.
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.
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.
“We’re still 9 mos from iPhone 15…”
Sales don’t happen until the end of September, and even then there’s a limited supply that goes quickly to zero. So it’s a much longer “waiting period” than 9 months, even assuming something doesn’t happen again next year to increase the “waiting period”. Remember: These are high quality, highly complex devices. You don’t just snap your fingers and get high volume….
“I think a lot of iPhone 14 Pro will be deferred to the 15 Pro…”
So? A sale is a sale is a sale. Apple cares, and should care, far more about the permanence of a sale than about when an upgrade is made. Again, kicking the can down the road means it’s still in the road, and that means iPhone 15 will have its orders swelled by the sales that are deferred.
Worrying about a sale being kicked down the road is short term worrying, which Apple doesn’t do, and neither should long term investors.
“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.
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.
“…which is damaging to investors.”
Far less damaging to long term investors than to short term speculators. In fact, I would argue that giving Apple an opportunity to buy back undervalued stock is a major gain for long term investors. Presently, anyone who bought and held AAPL from before buybacks has something like a 66% increase in “relative EPS” over folks buying AAPL today.
I’ve discussed this at length on this site for a very, very long time now.
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”.
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.
I agree that the Apple reality is much rosier than is being painted by the media in general. Same with inflation and the US economy.
That still leaves the volatile situation in Ukraine and the potential recessions in Europe and China. Even so, IMHO all the doom and gloom is overblown, and there is a real whiff of FUD in the air. The weak hands will of course panic (and some folks are counting on that), but in the case of Apple/AAPL, that’s slim pickings, since I am convinced that buybacks have increased the percentage of long term vs short term investors. People are smart enough to recognize true value and hang on to it.
The forgotten primary reason all these headwinds exist. Once that conflict is resolved investor sentiment is going to soar, and all that sideline money is going to come into play.
Just a small note: Russia isn’t doing well in Ukraine, to be polite Russia’s invasion has been an absolute failure. Not saying this is a result but reports today are that average gasoline prices are lower today, than they were a year ago.
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.
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.