There Are Huge Red Flags From iPhone Suppliers

Everyone on Wall Street has been trying to get a feel for the type of iPhone numbers Apple Inc. (Nasdaq: AAPL) will announce when it reports its fiscal first-quarter earnings on Feb 1. After taking a deep dive into Apple’s international supply chain, Bernstein analyst Toni Sacconaghi, Jr. says it’s not the first quarter investors need to worry about.

To get some insight on Apple iPhone sales, Sacconaghi identified 45 key Apple suppliers that each generate at least 7 percent of total revenue from Apple. Among those 45 suppliers, Bernstein chose 10 Taiwan-listed stocks that have the highest revenue correlation with Apple’s iPhone revenue. Bernstein then ran linear regressions based on supplier correlations to estimate both December and March quarter iPhone unit sales, and the results were mixed at best.

Bernstein’s calculations suggest first-quarter iPhone unit sales of between 76 million and 84 million. Consensus forecasts are calling for unit sales of 79.2 million, right in the middle of Bernstein’s projected range.

However, Bernstein now estimates iPhone unit sales in the second quarter of between 51 million and 57 million, well short of consensus estimates of 62.1 million.

Weak second-quarter guidance could potentially do a lot of damage to Apple stock, but Sacconaghi says the market may not react as negatively as investors fear to a low iPhone number.

“On one hand, weak iPhone in the March quarter would portend a very tepid supercycle, and likely be sobering for investors,” Sacconaghi says. “On the flip side, investors appear to be bracing for weak results.”

Even if iPhone unit numbers disappoint, average selling price and iPhone revenue growth will be strong, Apple will be one of the largest U.S. beneficiaries from tax reform and Apple appears to be making significant progress in its pivot to a serviced-based business model, Sacconaghi says.

This week, Apple announced it will be launching its highly anticipated HomePod home speaker in February. The HomePod will compete with the (AMZN) Echo and the Alphabet (GOOG, GOOGL) Google Home and potentially help integrate Apple’s services business deeper into customers’ daily lives.

Sacconaghi says investors may be more likely to forgive weakening iPhone sales numbers if Apple can demonstrate meaningful growth in services revenue.

Despite the mixed iPhone projections, Bernstein remains…

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