Apple shares bounced today after closing lower on Tuesday on the back of a warning about weak iPhone sales. The key takeaway most people took from Credit Suisse analyst Kulbinder Garcha’s report was that Apple slashed orders for iPhone components, thus suggesting weak demand for the company’s main product—something investors have been working about for the last couple of years.
However, Garcha also said that in the long term, sales of the iPhone will pick back up again.
iPhone weak, but only for now
The Credit Suisse analyst highlighted in his Dec. 1 report that checks from Apple’s supply chain indicate that the iPhone remains vulnerable—for now. The company reportedly cut component orders in November and is said to be looking for between 70 million and 75 million builds in December and between 45 million and 50 million in March. Garcha states that the order cuts appear to be the result in weak demand for the iPhone 6s and that he expects the current iPhone cycle to remain “subdued” over the “next few quarters.”
However, he emphasized that the weakness in iPhone demand will be temporary, with one reason being the iPhone upgrade program Apple introduced this year. The program should spur demand as consumers gradually sign up for it and then pick up a new iPhone every year. Over time, the analyst expects the installed bae to climb to 615 million as it has expanded by 24% over the last year.
Any reality in the iPhone 6c rumors?
Garcha said his estimates for iPhone units include the assumption that Apple will release a refreshed 4-inch phone, which the market is calling the iPhone 6c. It’s been more than two years since the release of the first “low-end” iPhone, the iPhone 5c, prompting some to think that perhaps Apple won’t ever release another 4-inch “low end” iPhone, possibly because sales for the less expensive model weren’t as strong as the company had hoped.
We’ve been hearing rumors about a refreshed 4-inch iPhone for the last couple of years, however, but he thinks this year will be different and that Apple will deliver. He noted that Apple’s guidance for capital expenditures and purchase obligations suggest a 25% upside to his iOS unit numbers, which he said is evidence that a new 4-inch iPhone is forthcoming.
Garcha also believes that while sales of the iPhone 5c were disappointing, this time a new 4-inch iPhone will work because its form factor will be “noticeably different” than the company’s current iPhones. He suggests that it won’t have Force Touch technology and added that he thinks it might be incremental to both earnings and sales. He estimates about 62 cents per share in additive impacts from a new 4-inch iPhone in the 2017 calendar year and believes that iPhone units could approach 265 million in the long term, even assuming a 4% cannibalization rate from the refreshed “low-end” iPhone.
The analyst has an Outperform rating and $140 per share price target on Apple. Apple shares were up 0.32% at $117.72 per share as of this writing.