Oppenheimer Lowers Apple Supplier Estimates On Weak iPhone Projections

Despite the hype surrounding Apple Inc. AAPL's 10th anniversary iPhone X, it appears Apple might fall short on shipments, according to multiple reports.

Apple delivers its first-quarter report after the close Thursday, Feb. 1. 

The Analyst

Oppenheimer analyst Andrew Uerkwitz reiterated a Perform rating on Apple.

The Thesis

The high price point and a lack of compelling features in Apple's iPhone X could result in a lower-than-expected number of customers switching or upgrading, Uerkwitz said in a Sunday note. (See the analyst's track record here.)

The analyst lowered his March quarter and June quarter iPhone shipment estimates by 10 million and 8 million units, respectively.

"Although Apple benefits from higher per-user app store spending over time, competing internet services pose increasing risk of ecosystem erosion," Uerkwitz said. 

Weakness in the dollar is expected to benefit the company's gross margin in the near term, the analyst said. Oppenheimer is projecting that Apple will deliver mild year-over-year improvement in margins in the next few quarters, given the improving yield and subsequent supply chain cost-downs.

Cash Flow, Tax Benefits, Low Multiples Limit Downside

A supercycle is unlikely to materialize, Uerkwitz said. Although expectations for future iPhone cycles may not drive significant stock returns, Uerkwitz did say Apple's ample cash flow, the U.S. tax legislation and low multiples could limit downside.

Oppenheimer updated its revenue and earnings per share estimates to reflect lower 2018 and 2019 iPhone shipments but higher 2018 and 2019 ASP, higher iPad shipments and slightly higher forex-driven margin improvement in early 2018.

The firm expects iPhone shipments to decline year-over-year in 2020 after moderate single-digit growth in 2019.

See also: Apple Supplier Stocks Could Suffer Short-Term, But KeyBanc Still Likes These

Expectations Tempered for Apple Supply Chain

With iPhone shipments tracking below expectations, Oppenheimer lowered its estimates for Apple supply chain stocks.

Additionally, the firm also sees additional headwinds from persistent China smartphone softness, with reports suggesting Apple may post its first year-over-year decline from 2017.

Although Oppenheimer expects supplier stocks to benefit from SAMSUNG ELECTRONIC SSNLF's GS9 refresh in the calendar first quarter, Uerkwitz said it may not be enough to offset Apple and China drags.

Bullish On Broadcom, Skyworks

Oppenheimer is bullish on Broadcom Ltd AVGO and Skyworks Solutions Inc SWKS. The view is premised on the firm's favorable long-term outlook on sustained RF content gains as the market moves toward 5G. Standout margins and free cash flow/return and execution at both companies were named by Uerkwitz as positive factors. 

Broadcom and Skyworks have over 20 percent and 40 percent exposure to Apple, respectively.

Lowering Estimates For Qorvo, Cirrus, Qualcomm

Qorvo Inc QRVO's China exposure is toward mainstream/low-end devices, Uerkwitz said. The company has 35-percent exposure to Apple, more than 10-percent exposure to Samsung and takes more than 30 percent of revenues from handset sales in China, he said. 

Oppenheimer lowered its calendar first- and second-quarter estimates for Qorvo. The firm now expects Q1 revenues of $775 million and earnings per share of $1.40. This compares to the prior estimates of $800 million and $1.48, respectively. Oppenheimer lowered its Q2 revenue estimate from $755 million to $745 million and earnings per share estimate from $1.33 to $1.29.

At Cirrus Logic, Inc. CRUS, Apple exposure is about 75 percent and Samsung exposure is less than 10 percent, according to Oppenheimer.

The company derives less than 10 percent of its revenue from the Chinese handset market, and its iPhone 8/X exposure declined due to a lack of content gains and ASP pressures.

Oppenheimer lowered its calendar Q1 and Q2 revenue estimates for Cirrus from $385 million and $370 million, respectively, to $370 million and $355 million. The Q1earnings per share estimate dropped from 95 cents to 76 cents, while estimates for Q2 were lowered from 87 cents to 74 cents.

Oppenheimer also reduced its Q1 revenue estimate for QUALCOMM, Inc. QCOM from $5.6 billion to $5.57 billion and its earnings per share estimate from 98 cents to 97 cents. The Q2 estimates were reduced from $5.63 billion in revenue and an EPS of 91 cents to $5.53 billion and 88 cents.

Apple Supply Chain Stock Ratings

• Broadcom: Outperform/$315 PT
• Skyworks: Outperform/$120 PT
• Qorvo: Perform
• Qualcomm: Perform

The Price Action

• Apple shares were down 2.07 percent to $167.96 at the close Monday. 
• Broadcom was down 2.12 percent at $245.47.
• Skyworks stock slid 0.26 percent to $97.10.
• Qorvo was up 0.37 percent at $68.19.
• Cirrus Logic shares lost 0.25 percent to $51.22.
• Qualcomm moved down 1.77 percent to $67.32.

Related Link:

The Street Isn't Recognizing The Strength Of Tech Data's Apple Ties

Photo courtesy of Apple.