Apple "Faces Risk Of Inventory Correction": Three Channel Checks Confirm Deteriorating iPhone Sales

One month ago, Credit Suisse confirmed what we had reported in the previous several weeks, namely that according to channel checks, iPhone supply chain orders had weakened recently adding that "in our view, the continued weak supply chain news could weigh on Apple shares for the next few weeks/quarters." The market did not like the news and sold AAPL stock only to promptly BTFD as it always has in the past 7 years: after all any transitory weakness is merely an opportunity to buy, right?

Only this time the weakness may not be transitory, because as of this morning we now have not one but three channel checks all pointing to a substantial slowdown in AAPL's flagship product and core revenue generator, the iPhone.

First, here is Credit Suisse with a follow-up penned last week, in which it writes that Asia supply chain confirms continued weakness.

"The CS Asia Technology Team has confirmed in their most recent November survey that the iPhone supply chain orders will be weaker than originally forecast. In our view, the continued weak supply chain news could weigh on Apple shares for the next few weeks/quarters. We continue to believe that with high retention rates, continued installed base growth, and the optionality of a smaller 4-inch iPhone, Apple remains an OP. "

 

Production cuts reconfirmed. Our Asia Tech Team has again confirmed that Apple has lowered its component orders in November and are now expecting builds of 70-75mn in December and 45-50mn in March (note the March estimate includes as much as 4mn iPhone 6c). The cuts seem to be driven by weak demand for the new iPhone 6s. As we had highlighted, we do see a subdued iPhone cycle for the next few quarters. We maintain our below consensus estimates of 78mn/55mn for Dec./Mar. We maintain our CY16 units of 222mn to reflect this and assume 235mn for 2017 (6% growth y/y).

We don't need to remind readers why a slowdown for Apple is bad for not only the market (where AAPL is the largest market cap stock) and the economy, but just in case here it is again: Apple Accounted For 20% Of All U.S. Margin Expansion Since 2010.

 If AAPL is about to hit a growth wall, then say goodbye to US margin growth of which AAPL accounted for one fifth in the past 5 years.

What's worse for AAPL, however, is that unlike a month ago, this time two additional channel checks confirm that not all is well in the world that Steve Jobs built.

According to OTR Global, Apple is seeing 'muted' sales for iPhones 6S, 6S Plus as sell-through volumes during mid-4Q appear to be weaker than volumes of iPhone 6, 6 Plus during mid-4Q 2014 for half of sources in China, North America and Europe. OTR cites senior managers and procurement heads from network operators and distributors in Europe, North America, China, and as Bloomberg reports,  the firm reiterates a 'mixed' read on AAPL.

Finally, as the WSJ notes, Pacific Crest joins the wall of worry with concerns that after iPhone sales rose solidly last quarter from a year earlier, demand for the soon-to-start quarter uis falling short of the investment bank's 59M-unit estimate. It adds that in the US, "we see increased risk of an inventory correction as retail-store inventory levels of approximately 4.5 days" for the latest iPhones "have reached levels that were not seen until five months after the launch of the iPhone 6."

Of course, since none of these three banks wants to lose AAPL as a corp fin clients, they all hedge by saying that there is room for error and that this weakness could simply be transitory. Unless, of course, even end consumers are finally reaching their saturation point with the AAPL product cycle, and after the failure that was the Apple Watch, it may well be that the iPhone 7 may seal the fate of the company - if it performs as relatively poorly as the current 6/6S product cycle, Tim Cook may have to dig very deep in his bag of magic tricks to channel the ghost of Steve Jobs and come up with a new and desirable product for a company which increasingly many say hasn't come up with anything truly original or creative since the passing of Jobs.