Apple (AAPL) stock drops after lowered estimates for iPhone XR sales

Marcio Jose Sanchez/AP

• Apple shares are sliding on Monday after a series of bad data points for iPhone demand.
• JP Morgan analysts said that iPhone unit sales could decline on an annual basis in both 2018 and 2019. 
• TF International Securities analyst Ming-Chi Kuo cut his forecast for iPhone XR shipments from 100 million to 70 million.
• Apple said earlier this month that it will no longer provide iPhone sales figures to investors. 

Apple is down more than 4% on Monday after a slew of analyst reports suggested that iPhone unit sales could drop year-over-year as soon as the first quarter of 2019. 

These reports come shortly after Apple announced that it would no longer provide iPhone unit sales, one of the key signals that analysts use to evaluate Apple’s business. Apple also provided lukewarm guideance for the all-important holiday quarter. 

The driver of the projected sales slump is that Apple’s new $749 phone, the lower-end iPhone XR, might not be the hot seller that Apple had hoped, and the company may be cutting orders for the device. Nikkei reported earlier this month that Foxconn had cut as many as 15 production lines for the device. 

Now, that’s being backed up by new reports by analysts from JP Morgan and TF International Securities. 

“We now forecast modest y/y declines in iPhone shipments for both calendar 2018 and 2019 on account of a weaker macro backdrop in emerging market,” Samik Chatterjee and other JP Morgan analysts wrote in a note distributed to clients on Monday, blaming the weak iPhone shipments on weak consumer confidence in emerging markets. 

“Led by the softer backdrop in the [emerging markets], the better than expected response to the iPhone XS and the iPhone XS MAX (the higher-end phones) is unable to entirely offset the more tepid than expected consumer response to iPhone XR (launched recently),” the analysts continued, downgrading their price target for Apple stock to $266 from $270.

TF International Securities analyst Ming-Chi Kuo had similar observations in a note released on Monday. 

“We have reduced our iPhone XR shipment estimation from 100mn units to 70mn during the new product lifecycle, Kuo wrote, citing reduced Chinese consumer confidence stemming from the trade war, high prices, and competition from Huawei. However, Apple’s less expensive older phones may get a sales boost from the weak iPhone XR. 

“The legacy iPhone models forecast is likely to increase significantly thanks to more affordable prices; the total iPhone shipments in 1Q19 are likely to see a YoY decline,” Kuo continued, citing Career and Nissha Printing as two suppliers that might be affected by Apple’s cuts. 

Another data point potentially contributing to Apple’s slide: Lumentum, a key supplier for parts that power facial recognition systems, said that a large customer had cut its orders by 30% — and Apple is its top customer. 

These data points come as fears that there is weak demand for Apple’s products in emerging markets including China, partly driven by a strong dollar making iPhones more expensive. 

The slide may also reflect fears that Apple knows that iPhone unit sales are going to go negative in the short-term, which is why it decided to stop reporting unit sales. Apple said that it prefered to focus on the company’s transition to a services company, with regular recurring revenue. 

“We believe these challenges are largely cyclical and investors should pay greater attention to the transformation to services, where Apple was able to report quarterly record revenue of $10 bn in [the most recent quarter] despite a regulatory challenge in China,” the JP Morgan analysts write. 

Apple CEO Tim Cook was directly asked about this possibility during Apple’s most recent conference call. 

“Some people may fear that this now means that the iPhone units are going to start going negative year over year because it’s easier to talk about great things and not show the details of things that aren’t so great,” Citi analyst Jim Suva said during the conference call. 

Apple CEO Tim Cook responded: 

“Jim, let me just add a couple things to that for color. Our installed base is growing at double digit, and that’s probably a much more significant metric for us from an ecosystem point of view and the customer loyalty, et cetera. The second thing is this is a little bit like if you go to the market and you push your cart up to the cashier and she says, or he says how many units you have in there? It doesn’t matter a lot how many units there are in there in terms of the overall value of what’s in the cart.”

Apple stock is down over 10% since it said it would no longer disclose hardware unit sales on November 1 — and these reports suggest that it may be a while before the company has another unit growth spurt. 

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