Apple may have a China problem.
In a note to clients after Apple’s third-quarter results, analysts at Cowen downgraded shares of Apple to “Market Perform” from “Outperform.” Their big concern: China.
Earlier this week, China reported better-than-expected gross-domestic-product growth in the second quarter, growing 7% against expectations for a 6.9% expansion. But even this growth rate is China’s slowest in over two decades.
And now Apple’s disappointing quarter may be confirmation that China’s economy is not only slowing, but slowing more dramatically than markets expect.
While [management] commentary sought to re-assure, iPhone units were light even adjusting for channel inventory. Normally, this would not concern us but evidence of a widespread demand reset from China is mounting (auto [sales], [United Technologies], [Fairchild Semiconductor], [Linear Technology] to name a few from what we watch). (These are, according to Cowen, economic data or US corporate earnings that have disappointed with China cited a key negative impact.)
Everyone worried about an economic slowdown in China and the impact it could have on the US economy should read that again: “… evidence of a widespread demand reset from China is mounting …”
On Tuesday, the defence giant United Technologies cut its full-year sales outlook for, among other reasons, “a slowing China.” And in June, Chinese auto sales declined over the prior year for the first time in over two years.
Decidedly negative signals from the world’s second-largest economy.
In the past few months we’ve seen a huge sell-off in the Chinese stock market, which has been viewed as either a harbinger of assured global economic doom or not a big deal because the Chinese economy isn’t as financialized (meaning the actual economy won’t be greatly affected by big swings in the stock market) as, say, the US economy.
But as Cowen notes, whether the impact on US companies is related to the recent stock-market action or not, there appears to be something off about the Chinese economy. At least as it appears to some of the biggest US companies.
On Wednesday, Apple shares were selling off after the company’s third-quarter results disappointed on sales, particularly for iPhone. On the company’s earnings conference call, Apple CEO Tim Cook said the iPhone sales miss was due to lower inventory.
At least by our count, Cowen appears to be the only Wall Street firm that downgraded Apple shares after the quarter, while most other firms either said Wednesday’s decline presented an opportunity to buy shares at a lower price, or emphasised that despite the disappointment, their thesis for Apple shares remained intact.
In its note, Cowen wrote that while the firm disliked “to downgrade stocks off earnings reports, we are convinced [Apple] has entered a transition period where risk/reward no longer supports an ‘Outperform’ rating.”
All companies go through cycles, and things can’t just get better forever. But a lot of the potential Wall Street has seen in Apple over the past year or so has been about China, which might not be the sure thing it used to seem.
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