Apple Enters Bear Market After Second Goldman Downgrade In One Week

Exactly one week after Goldman cut its AAPL price target to $209 from $222, after the bank cut its iPhone delivery forecast by 6%, or 15 million units, resulting in a 3% drop in revenue on what Goldman analyst Rod Hall cited :rapid smartphone demand deterioration in China”, Goldman did it again this morning, when for the second time in one week it cut its Apple price target to $182 “to reflect current price movement and a multiple more in the middle of AAPL’s three year trading range.”

Here is the summary from Goldman:

The Wall Street Journal reported this morning (“Apple Suppliers Suffer With Uncertainty Around iPhone Demand” November 19, 2018) that Apple is seeing deteriorating demand relative to what the company had initially expected. We flagged this risk in our October 15th Apple preview here due to rapid smartphone demand deterioration in China. This now seems to be playing out but there are a few additional twists that we see as important.

In addition to weakness in demand for Apple’s products in China and other emerging markets it also looks like the balance of price and features in the iPhone XR may not have been well-received by users outside of the US. Historically, a disproportionately large chunk of December quarter demand tends to come in the two-week period beginning a week before Christmas day so it is possible that things change though we do not believe this is likely.

Our estimates remain at the lower end of Apple’s guidance range at this point as we believe the company likely included this more negative scenario in its provided range. However, we do see material risk to March quarter guidance if current demand trends continue to play out. AAPL is trading at 13.9x our recently reduced CY19 EPS estimate of $13.40 roughly in line with the company’s last three years NTM average though we note that the stock’s trading multiple range extends down to a bottom of ~10x looking over the last three-year period.

With this report we are further reducing our 12-month price target to $182 to reflect current price movement and a multiple more in the middle of AAPL’s three year trading range. Reiterate Neutral.

As for the details behind the second Goldman downgrade in 7 days, here is Hall’s own explanation:

• Where we now stand on numbers. We currently forecast 71m iPhone units for the December quarter unchanged from our updated unit forecast just post the Lumentum large negative pre-announcement on Nov-12 (click here for our note). We are leaving our ASP forecast unchanged at $834, but we see some downside risk to this forecast should the mix of lower-end 8/8+/7/7+ models continue to trend higher. Our Apple revenue forecast for the December quarter is $89bn, which is at the low end of the company’s guidance ($89bn-$93bn).
• Unexpected weakness in China unfortunate for Apple. While it now seems that Apple may have miscalculated on the price/feature balance for the XR, we also believe that severe Chinese demand weakness in late Summer and a stronger USD were unexpected headwinds for the company that were difficult to predict. Based on historical industry patterns we have observed that replacement rates in saturated markets tend to be extremely sensitive to both FX and macro trends, similar to what we are observing in China and elsewhere.
• Pricing power evidence worsening. Apple’s success with iPhone X demand this summer and then a relatively healthy start to the XS cycle this fall suggested to us that pricing power was still intact. However, the laboratory of the market now points to Apple being at the limit of their price premium for the iPhone. In our experience with mobile phones, when pricing power is lost, consumer technology companies tend to either lose margins or market share or both.
• US-centric view may not be representative. Neither Apple nor the smartphone market are dominated by US demand. The US represents only 11% of total smartphone shipments and 32% of iPhone shipments in CY17. However, we believe Apple investors tend toward a US-centric view. We do not believe the rest of the world is as committed to Apple’s product ecosystem, so switching costs outside the US tend to be lower

And with AAPL stocks dropping another 2% premarket, and down to $182, the lowest price since late June, the world’s most valuable company, which as recently as a few weeks ago had a market cap of over $1 trillion, has now entered a bear market.

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