From a note to clients by analyst Samik Chatterjee that landed on my desktop Monday morning:
The focus of the earnings announcement on Tuesday will be on guidance for F2Q19, which (although not explicitly) should provide visibility into management’s near-term iPhone shipment outlook. Headed into the announcement, we believe buy-side expectations are already set quite low, including ~40 mn iPhone shipments in F2Q19 (and low double-digit percentage declines in calendar 2019 iPhone shipments), and is below volumes implied in sell-side consensus.
However, despite the low expectations set into the quarter, we believe there is limited head-room for F2Q19 guidance to surprise investors on the upside, given continuing headwinds to the consumer environment in China, elongation of the replacement cycle in most key smartphone markets globally, and pressures on ASPs from increasing trade-in values to drive volumes. While we expect the renewal in approval of gaming apps in China to help in sequential acceleration in Services revenues starting in F2Q19; we believe a greater focus will be on the long-term impact of the Services opportunity if the US-China stand-off were to escalate and drive domestic Chinese consumers to leave the iOS eco-system. Net, we believe despite low expectations heading into the announcement, there is little likelihood that the firm can address some of the major investor concerns just yet, and the stock price reaction is more likely to be range-bound…
It is important to keep in mind that the decline in iPhone shipments in China is not new. For example, starting from peak levels of iPhone shipments of 58 mn in 2015, iPhone volumes in China declined -22% y/y in 2016. Additionally, the declines in early 2018, including -7% y/y YTD (till 3Q18), appear to be largely better than or in line to the industry. Management commentary suggests an underperformance only starting in C4Q18 following the escalation in the US-China stand-off. We estimate that management commentary at the time of the pre-announcement suggested a 30% to 40% y/y decline in shipments, relative to a -20% y/y decline for the China smartphone market. Investors would be looking for a potential reversal in the US-China stand-off as early as possible to limit the impact.
Maintains Overweight rating and $228 price target.
My take: Despite his reservations about Apple’s Q2 guidance, Chatterjee remains one of Wall Street’s more bullish Apple analysts.