Analyst notes don’t usually start with a haiku, but that’s what Colin Gillis of BGC did in his recent missive on Apple:
The iPhone 7,
will not return the product,
to annual growth.
Gillis’s note is the most comically negative assessment of AAPL we have seen in some time. The headline is:
IPHONE 7: SOON IT WILL BE LIKE BUYING A MICROWAVE — SOMETHING PEOPLE DO, BUT NOT A MAJOR EVENT
He has a longtime “sell” rating on Apple stock, with a price target of $85 (AAPL is currently at $108). Although that’s extreme, Gillis’s case does restate some well-known and worrying facts about the future of the company: The iPhone tends to underperform growth in the global smartphone market as a whole. As smartphone sales have slowed to just 1.6% growth, that means iPhone sales are likely to stay negative for a while, he argues:
A decline in iPhone sales despite the launch of iPhone 7 would be a major problem for Apple, Gillis writes, because Apple doesn’t have another product big enough to pick up the slack when the iPhone falters. Here are the main points of his case:
- He estimates iPhone revenue growth will go down 5% in FY2017, “and we see downward risk to that estimate.”
- Overall smartphone market growth is expected to be only 1.6% in 2016, per IDC. “We see Apple losing market share over the upcoming year.”
- On top of that, future growth in the global smartphone market will come from poorer people entering at lower prices. That is not Apple’s strength. “We recognise that Apple CEO Tim Cook has stated smartphones have only penetrated 42% of the global handset market, but we see the remaining market share not well suited for Apple’s product line up and pricing.”
- Tim Cook’s joy over “Android switchers” who leave the Google platform and come to iPhone is overblown, Gillis says. “The CEO of Apple is fond of discussing customers who switch from Android, but we thought to add some clarity to his comments. During the FY2015 Q4 call, he stated that Android switchers were 30% of iPhone buyers. Sounds great! However, the maths points out that this is just 6% of Android users, which sounds less great. It also does not account for the fact that there are certain users who switch from iOS to Android. Certainly Android users switching to iOS is a potentially large market but the level of users actually moving from Android to iOS is likely less than 5% of the Android base.”
- Demand in China, Apple’s second-biggest market, is still slow.
- The change in storage, with the options — all users get at least 32GB, double the 16GB minimum in the last one — “is likely to have a negative impact on average selling prices,” Gillis says. As customers will no longer need to pay more for more storage, Apple will give up “$20-$50 per unit, revenue that is almost entire profit.”
In sum, Gillis sees Apple’s dependence on the iPhone as a “liability”:
“The dependence on the iPhone, which drives ~60% of revenue has now become a liability and even the strongest brands in technology are subject to the fickle fancy of consumers.”
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