Goldman Cuts Apple: Sees 3% Revenue Drop, 15 Million Fewer iPhones Sold On Weaker Chinese Demand

One day after Apple stock plunged  5% when 3D sensor supplier Lumentum (LITE) reduced its December quarter revenue guidance by 17%, citing "reduced shipments from one of its largest 3D sensing customers" (which is Apple), the pain is piling on, and moments ago Goldman Sachs cut its AAPL price target from $222 to $209, as a result of read throughs from the LITE announcement, which according to Goldman will result in 6% fewer (or 15 million units) iPhone units and a 3% drop in revenue.

Here is how Goldman analyst Rod Hall reads the Lumentum announcement:

Lumentum preannouncement. Lumentum reduced its FQ2 (to Dec) revenue guidance by 17% at the midpoint citing reduced shipments from one of its largest 3D sensing customers. We calculate this implies a ~23m cut to VCSEL units in December and March, which after inventory and yield adjustments implies ~15m lower FaceID based iPhone units in Dec/Mar quarters.

Note that LITE as a VCSEL supplier wouldn’t necessarily have a complete view of end demand for iPhones. However, given the extent of the cut and what we believe is ~100% share for LITE at Apple for the large VCSEL array, we are concerned that end demand for new iPhone models is deteriorating. We note this could easily right itself given the bulk of demand comes in late December but we feel more prudent sell through forecasts are warranted due to the timing and magnitude of this warning.

According to Goldman, the reason behind the cut is incremental weakness out of China: "On the FQ1’19 call, Apple indicated macro and FX driven consumer weakness in EMs such as Russia, Brazil, Turkey and India. We suspect that China also weakened during the quarter."

As a result of the above, Goldman is reducing its FQ1’19 iPhone units estimate by 5% and cutting its FQ1 total revenue forecast by 3% to $89bn. Hall then notes that his FQ1 revenue estimate is "now at the low end of Apple’s guidance given on Nov 1 ($89bn-$93bn)."

While Apple may have already contemplated some weakness in its guidance, we feel the timing and magnitude of the LITE  reduction suggests Apple is seeing incrementally worse demand data.

Bottom line: Goldman is reducing its 12-month price target to $209 from $222 based on ~16x P/E its CY’19 EPS estimate of $13.40

In response, AAPL stock is not happy, and is down another 1.2% in the premarket, having faded all earlier gains. It's time for more buybacks...