Longbow Research Says Apple's iPhone Story Is Showing Cracks

Negative headlines surrounding iPhone demand continue to haunt Apple Inc. AAPL, with the latest warning coming from a Longbow Research analyst.

The Analyst

Analyst Shawn Harrison maintained a Neutral rating on Apple shares. 

The Thesis

Orders for iPhone are weaker year-over-year, and Baidu Inc BIDU iPhone searches fell sharply in October, pointing to faltering Chinese demand, Harrison said in a Monday note. (See his track record here.) 

The analyst's spot checks late last week showed 20-23-percent iPhone order cuts, especially for the iPhone XR and XS Max — which could only be partially offset by 20-25-percent increases for the 8/8 Plus and older iPhone models, the analyst said. 

That said, Harrison noted above-seasonal sales for Apple's Taiwanese suppliers, including Pegatron, in October.

If November and December fall in line seasonally, Longbow projects year-over-year calendar year fourth-quarter sales to be 60 basis point worse than the three-year average, but 140 points better than the 5-year average.

The iPhone production cut is likely reflected in Apple's fiscal-year first-quarter sales guidance, Harrison said. The consensus forecast for Q2 is weaker than is seasonally typical, he said. 

The analyst forecast a product mix shift toward older models, creating ASP pressure.

The clearest risk, according to Longbow, is for Apple suppliers, on the basis of order cuts that appear to have occurred in the last week. 

"We estimate the cuts were 12-million-plus on new devices (XR and XS Max with little change to XS), but a production increase of 3 million on legacy devices," Harrison said. 

Longbow projects 2019 EPS growth fueled by higher ASPs across devices; the ongoing strength in Services, the Watch and Airpods; and aggressive capital return.

The Price Action

Apple shares were down more than 4 percent at $196.23 at the time of publication Monday. 

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Photo courtesy of Apple.