year anniversary iPhone8 may also attract some high-end Android users in China that may convert to the. iPhone8. Other t
May 3, 2017 Mariano R. Viola, PhD Consumer & E-commerce Analysis (917) 751-3733
[email protected] www.violaadvisory.com
Apple, Inc. (AAPL): Short @ $95.00 Short Thesis: We maintain our Short rating and PT of $95. We see some risks this year of Apple meeting the Street’s high expectations of record total revenue (north of $78B) and iPhone unit shipments (greater than 78M units) following the release of the iPhone8 in 2H17. Growth rates in iPhone revenue and iPhone unit shipment are heavily dependent on Greater China revenue growth. Over the last 5 quarters, Apple’s sales growth in China have steadily declined as the company has lost market share to Chinese smartphone vendors. If the product launch of the iPhone8 fails to attract huge consumer interest in China, then there is risk that Apple could fall short in delivering the stellar growth numbers that the market is expecting from the release of the iPhone8.
TABLE 1: Apple F2Q17 Results F2Q17 Results
F3Q17 Guidance
F2Q17 Results
F3Q17 Guidance
EPS
Cons.
Result
EPS
Cons.
Result
Total Rev.
Cons.
Result
2.10
2.02
beat
n/a
1.58
n/a
52.9B
52.97B
miss
Total Rev.
Cons.
Result
43.5-45.5B 45.57B
miss
Source: Apple, Inc. and Estimize.com
I.
Losing Market Share in China
According to the latest IDC Quarterly Mobile Phone Tracker, the Chinese smartphone market grew 19% y/y in 4Q16. For 2016, the market grew by 9% with top Chinese smartphone vendors taking up a larger share of the market. The four Chinese vendors in the Top 5 were the same in 2015, and their share grew from 46% in 2015 to 57% in 2016 (see Table 2). This trend shows the growing local acceptance of Chinese vendors by Chinese consumers with improvements in product features and better marketing messages compared to last year. TABLE 2: Top 5 China Smartphone Vendors, by Unit Shipment Market Share (in Million Units)
Source: IDC Quarterly Mobile Phone Tracker, 2/6/17
1
VIOLA ADVISORY, LLC
05/03/17
2016 was the first time that Apple saw a y/y decline in China. Even though the new black colored iPhones caught the attention of consumers, overall, the new launches did not create as much of a frenzy as in the past. Despite the decline, IDC does not believe that Chinese vendors actually converted existing iPhone users away from Apple. Rather, most Apple users are expected to be holding out for the new iPhone8 that will be launched this year, and that will help Apple see some growth in China in 2017. Apple’s 10year anniversary iPhone8 may also attract some high-end Android users in China that may convert to the iPhone8. Other trends expected from the China smartphone market in 2017 include: •
Chinese vendors are starting to launch phones with dual cameras and curved screens. This will likely be the norm for most flagships in 2017. Cameras will continue to be a key focus in the marketing messages by vendors especially given the strong selfie culture in China, as exemplified by the popularity of apps such as Meitu.
•
Similarly, Chinese vendors will be aggressive with other new technologies such as flexible screens, augmented reality, and other new areas. In the past year, vendors such as Huawei, Xiaomi, and LeEco developed phones with dual cameras, thin bezels, and digital headphone connectors well before many overseas vendors did. More bold experimentation is likely, even if these technologies may not immediately lead to higher shipments.
II.
iPhone Revenue and Unit Shipment Growth Driven by China Sales Growth
The growing strength of local Chinese smartphone vendors like OPPO, Huawei and vivo is of particular concern to Apple’s overall revenue and unit shipment growth since revenue in Greater China represents about 20% of Apple’s total revenue in F2Q17. Moreover, iPhone revenue on average, represents around two thirds of Apple’s total revenue and iPhone unit shipments accounted for about 80% of Apple’s total unit shipments in F2Q17. The concentrated exposure of Apple to a single product – the iPhone – creates huge market uncertainty around the release of the new iPhone8 later this year. We believe the Street is not properly accounting for the recent softness of iPhone sales in China as it projects record high total revenue numbers north of $78B and lofty unit shipment projections exceeding 78M units for the iPhone8 release in 2H17. These record revenue and unit shipment numbers were achieved at the last F1Q17 quarter with the release of the iPhone7. Figure 1 shows that Apple’s total iPhone revenue (left chart) is dependent on China sales growth (right chart). FIGURE 1: iPhone Revenue Growth (Y/Y %) left chart and Total Revenue Growth, by Geography (Y/Y %) right chart 10%
5%
1%
20% 14% 1%
10%
0%
0%
-10%
-10%
-20% -30%
-18%
Source: Apple, Inc.
-30%
-23%
iPhone
-12%
-20%
-13%
-26% -33%
-40%
Americas
-14%
-30%
Europe
Greater China
2
VIOLA ADVISORY, LLC
05/03/17
Year-over-year revenue declines in China of 26% and 33% in F2Q16 and F3Q16 respectively also drove down total iPhone revenue growth by 18% y/y and 23% y/y for the same periods (see Figure 1 left and right charts). Total revenue managed to reach 5% y/y growth in F1Q17 only because Americas revenue grew by 9% y/y while Europe remained flat at 3% y/y, largely offsetting the 12% y/y decline in China for the same period. However, as sales growth in China further declined to 14% y/y in F2Q17, iPhone revenue dropped to a 1% y/y growth for the same period, despite the 11% and 10% y/y growth of the Americas and Europe respectively in F2Q17. FIGURE 2: iPhone Unit Shipment Growth (Y/Y %) 10% 5% 0%
5% 0% -1%
-5% -5%
-10% -15% -20%
-16%
-15%
iPhone Source: Apple, Inc.
The same can also be said for the iPhone unit shipment which fell by 16% and 15% respectively in F2Q16 and F3Q16 as China sales dropped by 26% and 33% y/y during the same period (see Figure 2). Unit shipment only managed to reach a 5% y/y growth in F1Q17 as the Americas revenue recovered to 9% y/y over the same period while sales in Europe remained flat at 3% y/y (see Figure 2 and Figure 1 right chart).
Despite further sales growth in both the Americas (up 11% y/y) and Europe (up 10% y/y) in F2Q17, the continued decline in China sales (down 14% y/y) was a large factor in dragging down iPhone unit shipment (down 1% y/y) in F2Q17 (see Figure 2). As Apple sales continue to weaken in China due to the resurging growth of Chinese smartphone vendors, we believe there is a short-term risk that Apple may not meet the lofty expectations the Street is expecting around the release of the iPhone8 in 2H17. Moreover, the product innovations being brought to market by Huawei, Xiaomi, and LeEco, i.e., dual cameras, curved screens, thin bezels, digital headphone connectors, flexible screens, etc., have already been introduced to Chinese consumers, way ahead of the iPhone8 launch. This brings into question what the iPhone8’s value proposition is for Chinese consumers, when they already have those features in their smartphones.
3
VIOLA ADVISORY, LLC
05/03/17
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