What A Slowdown In China Means For Apple

Economic concerns in China and could potentially impact Apple Inc. AAPL as consumer demand slows in the world's second-largest economy, according to Goldman Sachs.

The Analyst

Analyst Rod Hall maintains a Neutral rating on Apple's stock with an unchanged $240 price target.

The Thesis

Chinese economic numbers point to a substantially weakened macro economy, Hall said in a Sunday note. (See his track record here.)

They include:

PMI fell from 51.3 in August to 50.8 in September.
Auto sales that deteriorated 12 percent year-over-year in September versus August's 4-percent decline.

Smartphone data is stirring similar concerns, as total unit volume in China likely fell 15 percent year-over-year in the third quarter — "unheard of" in the usually strong quarter, the analyst said.

While much of the weakness was likely seen in the mid- and lower-range category, the high-end market (6-inch screens, $350-plus) continued to expand, Hall said. It's "hard to believe" there was no impact to Apple's business in the quarter, he said.

Apple didn't have exposure to the 6-inch smartphone category last year in China, but the introduction of the 6.1-inch XR and 6.5-inch XS Max gives the company direct exposure to the growing segment, the analyst said. At the very least, the new phones should help offset negative macro headwinds and poorer performance in smaller devices, he said.

EPS Sensitivity

Goldman Sachs' central case scenario calls for Apple sales of $11 billion in China in the December 2018 quarter.

Apple's market share should improve from 13 percent to 14 percent, but the overall smartphone market is expected to contract 11 percent year-over-year, Hall said.

If the Chinese smartphone market declines 15 percent in the same quarter and Apple still controls 14 percent of the market, its revenue would fall to $10.519 billion and negatively impact December 2018 EPS by 0.9 percent, the analyst said.

Under a worst-case scenario modeled by Goldman Sachs, Apple's Chinese market share would fall to 12 percent and the overall smartphone market would contract 15 percent. In that case, the negative impact to Apple's EPS in the quarter would be 3.7 percent.

In a more bullish scenario, if Apple grows its market share to 16 percent and the smartphone market slows by 3 percent, Apple's EPS estimates would move 5 percent higher.

Heading into Apple's September-ending earnings report set for Nov. 1, investors should expect Apple to offer a conservative guide for the December-ending quarter, Hall said. Street estimates are "generally perceived to be conservative" given market conditions, he said.