"Has the Apple gone sour?"
That's what JPM's tech/semi analyst Narci Chang wants to know after looking at recent iPhone X orders where he sees "more signs of weakening" and is revising his forecast for iPhone production to plunge by 50% Q/Q, "even larger than the decline of the iPhone 8/8+."
"Our EMS forecast for total iPhone is now 55mn in 1Q (vs 60mn before), and iPhone X is now 20mn in 1Q (vs 30mn before)." - JPM
Unfortunately for AAPL fans, this is not some year-end calendar quirk, but instead JPM believes the "weakness will continue in 1H18 as high-end smartphones are clearly hitting a plateau this year."
Noting that JPM downgraded the Apple Supply Chain in mid-September given that: 1) iPhone X expectations are largely priced in, and 2) sustained growth into the 2018 iPhone cycle is unlikely, given limited design changes in the next cycle (click for podcast and note), Chang warns that "now we believe the peak has arrived even earlier than our expectations."
Chang also writes that as a result of the steep plunge in orders, he expects upstream component build for iPhone X to stop in May, while new iPhone component build may start earlier in late-June as Tim Cook hopes the new generation of iPhones will salvage what is clearly becoming an extremely saturated industry.
Instead of taking any action on AAPL now - although it is likely imminent - JPM said it was re-adjusting its supply chain view as follows:
Despite robust revenue from iPhone X suppliers in 4Q, demand has gone sour quickly. Along with this note, we have lowered our 1Q forecasts for Win Semi (OW), Merry (OW), Largan (N), Hon Hai (N), and AAC (OW), and cut full-year forecasts/lowered price targets for LGI (N), and downgraded Sony to N. We still like suppliers with long-term content growth potential, but would like to caution 1H18 weakness and saturated growth for high-end iPhones.
- For Win Semi, we are still highly convinced all three new models in 2H18 will have 3D sensing while a rear-end 3D sensing module in 2019 could provide upside potential.
- For Merry, we forecast that earnings exposure from iPhone is <5% anyways, while the company has 6% dividend yield support here.
- Largan, on the other hand, may face intensified competition, and we also lowered the forecast to factor in that 6.05" LCD phone will NOT have dual camera this year, contrary to market expectations.
- On AAC, we believe the new verticals and dollar content growth, and the China smartphone exposure, are able to help the company maintain 20%+ earnings growth this year. For Hon Hai, we expect further earnings downgrades to weigh on the share price.
And while this market has long ago stopped responding to news, the JPM announcement was enough to knock the stock modestly of its day highs, even if it is still green for the day despite what - if JPM is right - is an indication of a collapse in iPhone X demand.