Top iPhone Supplier Issues Demand Warning; Morgan Stanley Slashes Handset Production Estimates

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by Tyler Durden
Wednesday, Dec 07, 2022 - 01:40 PM

Apple shares fell more than 1.5% in premarket trading amid new signs that iPhone 14 demand wanes after a key supplier expects to reduce handset production and Morgan Stanley slashed fourth-quarter iPhone estimates. 

Apple Supplier Murata Manufacturing Co.'s President Norio Nakajima told Bloomberg in an interview, "Judging by handset availability in stores, I see a downward revision happening," and he "hopes that it won't be too deep."

Nakajima's comments didn't directly specify Apple, as its customary for suppliers not to talk about their clients, but this adds yet more evidence the global smartphone industry is in shambles. 

Bloomberg reported last month that Apple reduced iPhone output on declining consumer demand. 

In April, Murata forecasted total handsets produced would be around 1.37 billion units, slightly increasing from 1.36 billion in the previous year. Then in October, it reduced estimates to 1.2 billion and, two weeks later, to 1.09 billion. The latest estimate is 1.08 billion due to sluggish Chinese demand. 

"If our forecast was to fall further, that would be because of the US customer," Nakajima said. 

Murata is a Japan-based manufacturer and a critical supplier of electronic modules and components for iPhones. Comments from Nakajima might serve as a proxy for iPhone production

"I went shopping with my son last Sunday to buy a handset by our main customer for him, and the store had every model and every color in stock.

"I wouldn't be surprised if, down the road, the customer even further revises down its forecast," Murata top exec said. 

And it's no secret the global smartphone industry is decelerating because consumers are pulling back on discretionary spending. For example, as inflation runs rampant, US consumers are plagued with 19 months of negative real wage growth. Savings for lower-tier consumers are depleted, and credit cards are mostly maxed out. 

We outlined over the summer, "the smartphone industry is facing increasing headwinds from many fronts – weakening demand, inflation, continued geopolitical tensions, and ongoing supply chain constraints."

Hours after the Bloomberg report, Morgan Stanley analyst Erik Woodring published a note to clients, outlining how he slashed fourth-quarter iPhone estimates by 3 million to 75.5 million, which brings the revenue forecast for the quarter down 3% to $120 billion, citing production woes at the Hon Hai factory in Zhengzhou. 

His iPhone shipment estimate for the quarter ending in March is unchanged at 56.5 million units. He kept his $175 price target and Overweight rating on Apple shares, even though outlining the December quarter EPS estimate of $1.88 is 6% below consensus. 

Woodring outlined three scenarios: A bull case of $235 PT, a base case of $175 PT, and a bear case of $105 PT. 

He pointed out that lead times for the new iPhone are the highest in years. 

And the recovery of the smartphone industry depends on what type of economic landing global central banks produce next year after this year's most aggressive interest rate hikes in a generation to quell inflation.