Reaction to Reduced iPhone Orders Overblown
Production in the 80 million range would be entirely reasonable and is not an indication that iPhone end customer demand (and thus revenue) will be significantly lower than last year.
We will maintain our $175 fair value estimate for narrow-moat Apple, as the Nikkei Asian Review reported, "Apple warns suppliers of 20% drop in new iPhone parts orders." We're also maintaining our fair value estimates for related chip suppliers like narrow-moat Skyworks ($106) and Qorvo ($83). We continue to view Apple as slightly overvalued and see a modest margin of safety in Skyworks today.
If accurate, the report suggests that initial iPhone production for Apple's (AAPL) latest slate of smartphones will be down from 100 million units produced last summer to 80 million units being built this July and August ahead of Apple's anticipated iPhone introduction this fall. In our view, production in the 80 million range would be entirely reasonable and is not an indication that iPhone end customer demand (and thus revenue) will be significantly lower than last year. We note that Apple sold 78 million iPhones in the December 2017 quarter, relatively consistent with the December 2014-December 2016 quarters. Thus, the 100 million unit build last year was essentially for a super cycle that did not come to fruition, leading to excess chip inventory that plagued a host of Apple suppliers in early 2018. We view these lower levels of early iPhone production in 2018 as raising the likelihood that Apple will avoid another big inventory buildup, rather than a sign that customers will not flock to the company's new iPhones.
We note that our $175 fair value estimate for Apple is not based on the hopes of an iPhone super cycle in the next 12 months, especially since this is the second year of a high-end iPhone model with 3D sense and OLED screens, rather than a brand new introduction. We continue to model Apple selling iPhone units in the high-70 million unit range in the December 2018 quarter, again relatively in line with recent historical results. Our fair value estimates for Skyworks, Qorvo, and many other iPhone-related chipmakers also incorporate similar sales levels.
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Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.