The main reason why last week's market rout was not even worse, is because AAPL, the world's biggest company by market cap and a core pillar of both the S&P and Nasdaq, staged one of the biggest weekly rallies in years following reports of better than expected adoption and pre-order reports from carriers. However, at least according to JPMorgan, it was all a lot of noise and very little signal.
As JPM's Rod Hall writes in a note release overnight, the positive market reaction is "premature." He adds that JPM "updates on Apple this morning post the positive US carrier commentary of last week and in conjunction with a subscriber base update from our US Telecom team headed by Phil Cusick here (LINK). Our current US iPhone Y/Y growth estimate of 4% for the Dec QTR within our below consensus iPhone sell-through expectation of 69.4m units looks, if anything, optimistic against our Telco team's bottom up modeling. We note that Apple typically runs shortages at this point in a launch and that this is likely exacerbated by lower initial builds than we saw last year. We are sticking with our cautious late 2016 stance on Apple based on our below Street iPhone expectations though we continue to believe the stock is undervalued with better options for growth in 2017."
Here are the other reasons why JPM remains bearish:
- US subsidies likely to end in Oct: The four major US carriers have announced subsidies on the iPhone 7 which our Telco team expects will end in October similar to last year. All are offering a “free” upgrade to the iPhone 7 32GB model net of the value of a traded in iPhone 6/6s.
- Interpreting US Carrier comments: Sprint said that its pre-orders for iPhone 7/7+ were up more than 375% Y/Y in the first 3 days post launch. T-Mobile announced iPhone 7/7+ pre-orders up nearly 4x compared to the next most popular iPhone (assume 6/6+, but could be 6S/6S+). Verizon at a conference noted iPhone was business as usual, while AT&T said volumes were up y/y and compared to the company’s expectations. In the case of both AT&T and VZ our Telco team believes volumes are up a little due to the more aggressive than expected promos but not substantially over prior expectations.
- Putting the US in context: Our caution on Apple has been centered on increasingly important non-US markets where we have seen negative demand deviations as well as ASP downshifting. The US currently accounts for 35% and 32% of our Sept and Dec Qtr iPhone unit estimates accordingly. Notably, we are expecting 4% Y/Y growth in the US in the Dec Qtr and a 2% decline in Sept. after a 5% decline in June. At present we believe the increased promos could pull demand into the Sept. Qtr.
- Thoughts on shortages: Apple said they exited FQ3 to June with channel inventory levels "at the low end" of their normal range which we calculate was achieved with an unprecedented 4m unit reduction during the June quarter. We believe this suggests that Apple was cautious heading into Fall and likely built less iPhone 7/7+ units as a result. This ties with our checks suggesting a current build order of ~70m units in H2 vs. 85m-90m at about the same time last year. We know that the accuracy level of these checks is typically poor but the deviation from last year is notably large and suggests a cautious approach to demand on Apple's part.
- Samsung debacle helpful: The Galaxy Note 7 exploding battery problem could result in a windfall for Apple. For reference, our Samsung analyst, JJ Park, estimates 3.5m and 5.5m GN7 units sold globally in Q3 and Q4 respectively. However, given Note demand tends to concentrate in the same non-US areas where we have seen ASP downshifting and general weakness we would expect some lost sales to go to lower priced devices or simply to be lost.
With AAPL stock continuing its momentum surge from last week, at least for the time being, algos are far less concerned with JPM's negative readthroughs on AAPL sales and are eager to continue buying on hopes that AAPL's fate has finally changed. The answer whether that is indeed the case - and whether the recent buying spree has merely been an accelerated execution of a stock buyback by Tim Cook - will have to wait wait for at least five weeks when Apple release Q3 earnings in the end of October.