Apple’s eye-popping iPhone revenue growth has been mainly driven by higher average selling prices (ASPs), but that setup is no longer enough to offset waning demand, according to one Wall Street analyst.
“Whereas a year ago Apple looked like a table-pounder when iPhone units were weak but about to be more than offset by a big jump in average selling prices (+17%Y/Y in FY18), which ultimately drove Apple’s best iPhone revenue growth in 3 years,” Robert Cihra, an analyst at Guggenheim, said in a note distributed on Wednesday.
“Over the past 10 years, Apple’s iPhone ASP has increased a dramatic + $220, or 40%, reflecting its growing value to both consumer and business markets, but nearly HALF of all that just came in FY18 alone, making a period of digestion now likely.”
And recent news around weaker smartphone demand has backed up Cihra’s conclusion.
On Monday, Lumentum, the main supplier of the Face ID technology in Apple’s latest generation of iPhones, slashed its outlook, citing a reduced shipment request from one of its biggest customers. And on Tuesday, Qorvo, which supplies radio-frequency chips to Apple, also cut its guidance, citing a drop in demand for flagship smartphones. Similarly, a handful of other iPhone suppliers, such as screen maker Japan Display and British chipmaker IQE Plc, also lowered their forecasts this week. None of the companies specifically named Apple as the culprit.
Considering the guidance cuts, Cihra estimates that iPhone unit sales will slide 5% annually during the fiscal year 2019, but that its blended iPhone ASPs will only increase 3% year-over-year, leaving a 2% iPhone revenue gap. According to Apple’s annual filing, its iPhone unit sales were flat in 2018, but total iPhone revenues were up 18% thanks to the jump in its ASPs.
“Moreover, we see growing risk of even softer iPhone unit demand, with downside in China, India and other emerging markets, where Apple may need to start considering lower price points,” Cihra added. He downgraded Apple to “neutral” and removed his prior $245 price target.
Similarly, Goldman Sachs on Tuesday trimmed its iPhone unit sales estimate by 6%, and cut its price target from $222 to $209 – 8% above where shares were trading Tuesday. The bank’s analysts noted “end demand for new iPhone models is deteriorating.”
Earlier this month, Apple reported underwhelming third-quarter iPhone sales, and said it would no longer reveal unit sales for its hardware. Shares have fallen 15% since the report, pushing Apple’s market capitalization below $1 trillion.
Apple was up 9.6% this year.