Apple’s shares have fallen (9.4)% in the past three weeks from $118.25 to $107.11 since it announced its September quarter results and gave December quarter guidance. This compares to the NASDAQ being essentially flat in the same timeframe. There are five main reasons for the weakness in the shares. (Note that I own Apple shares).
Stock was strong going into earnings announcement
Apple’s shares had moved from $107.70 the day that the iPhone 7 was announced to a recent high of $118.25 the day of the earnings announcement, a 9.8% increase. They had also seen a strong 22.3% increase from July 26, the day the company announced its June quarter results, to October 25, the day it released its September quarter results. In both of these timeframes Apple’s shares had significantly outperformed the NASDAQ.
September quarter iPhone sales a bit disappointing
Apple sold 45.5 million iPhones in the September quarter, which was down 2% from the 48 million sold a year before. When adjusting for inventory changes iPhone sales declined from 46.1 to 43 million or down 7% year over year. Apple did call out that iPhone 7 demand has significantly outplaced supply but keep in mind that the iPhone 7 had 9 days of sales in the September quarter and a full quarter of the iPhone SE vs. a year ago the iPhone 6s only had two selling days before the end of the quarter and there was no SE equivalent. Overall I believe iPhone sales were a bit worse than expected.
Source: Apple
December quarter guidance a bit below expectations
Apple’s December quarter revenue guidance was $76 to $78 billion, which at the mid-point will be a 1.5% increase from the prior year. However this year’s holiday quarter is 14 weeks vs. the typical 13 weeks so an extra week should provide a 4% to 7% revenue bump which would mean that sales on an adjusted basis could be down year over year. While the guidance was above the Street’s published forecast of $74.65 billion I don’t think that all of the analysts had raised their outlook for the 14th week so it would probably be more in-line with their thinking vs. being better than expected.
When you use all of Apple’s guidance metrics the EPS range is $3.10 to $3.24 for the December quarter. Analysts had been at $3.17, which is exactly the mid-point of guidance, but again I don’t think all the analysts had incorporated the 14th week so their expectations would have been a bit higher.
KGI expectations for the December and March quarters
KGI analyst Ming-Chi Kuo published a report saying that he expects iPhone suppliers to decrease shipments by 5% to 15% in November or December. What is interesting is that he is keeping his iPhone unit forecast of 70 to 75 million units.
He also reiterated that iPhone shipments in the March quarter could be lower than the previous year. If he is correct than the current analyst projection of $54.88 billion in the March quarter is too high since Apple generated $50.6 billion in revenue earlier this year.
Trump’s rhetoric
Trump has said that he would impose a 45% tariff on Chinese produced goods along with many other countries. This of course would have a major negative impact on Apple in multiple ways.
If it was enacted it would raise the price of iPhones and other Apple products sold in the US and reduce demand. The winners in this case could be Samsung along with other foreign made smartphones (or maybe nobody benefits relative to each other). It would also not get Apple to shift production to the US since there isn’t the infrastructure or the manpower to build the number of units needed in this country. And it would take years to set up if it could be done.
Also China would not idly sit by. It appears that China’s President Xi Jinping told Trump “A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S.”
While Trump will probably get tax reform that includes bringing back overseas cash at a lower tax rate (which would be a huge positive for the shares) his other statements will outweigh this until there is clarity on what he will actually do.
Watch: Why Apple’s iPhone is too big to fail
