Morgan Stanley trims Apple price target to $236

Analyst Katy Huberty flew to Asia and got an earful.

From a note to clients that landed on my desktop Friday morning:

China smartphone market responsible for recent weak iPhone data points… Our recent meetings in Asia highlight a weakening China smartphone market, especially at the high-end where suppliers have seen order cuts across most vendors. Importantly, our Google trends analysis suggests global demand for the new iPhones is holding up, at least relative to past cycles, after the XR launch in November (Exhibit 1) which, combined with strong uptake of higher NAND capacities and better than expected mix of XS and XS Max, suggest iPhone revenue downside is largely isolated to China.

…and replacement cycles are to blame. China is following in the footsteps of the US with replacement cycles lengthening after a structurally shorter cycle over the last decade. We attribute this to improving product quality across most vendors and smartphone ASPs that are up 22% in the past two years (per IDC). Our analysis of shipment data suggests that for the broader China smartphone market, replacement cycles have lengthened materially in the past two years (Exhibit 2), but for Apple, the replacement cycle lengthening in China has been more pronounced, with implied replacement even longer than the market over the past year (Exhibit 3). Assuming iPhone replacement cycles in China extend another 6-9 months implies 9-15M unit downside, and we therefore lower our FY19 unit estimates by 13M units to 200M (from 213M), equating to 8% Y/Y unit declines…

Wearables and Services help smooth iPhone cyclicality. Importantly, weak iPhone shipments on the back of lengthening replacement cycles doesn’t translate to installed base and Services weakness. Case in point – the iPhone installed base grew double-digits and Services revenue growth accelerated (from 23% to 26%) in FY18 despite the fact iPhone units declined 6% in the prior two years. As a result, our 21% five year Services revenue CAGR is unchanged, and we see potential upside to the extent Apple launches new services, like Video (see here for more details) or extends new services like ads and payments, all of which are likely in our view. Additionally, our checks suggest wearables – namely, Watch and AirPods – continue to sell well with demand outstripping supply for AirPods two years after initial launch. For context, our supply chain conversations point to a doubling of AirPods production in FY19, which is the primary driver of our new, higher Wearables estimates.

Maintains Overweight rating, lowers price target to $236 from $253.

My take: Et tu, Katy?