First of all, do not take this as a negative Apple (NASDAQ: AAPL) article. Sure, I think the supply is too much, but what I’ll be writing here is just factual. I will show how the market has become incredibly biased in dealing with Apple news.
This will be easy to see. First, I would like to ask you to go back to January 9, 2020. At that time, great emphasis was placed on the enormous success of Apple in China. It was just reported that in the month of December 2019, the iPhone sales in China had grown by a whopping 18.7%. These were, surely, the strongest signs of turning the corner in this so important market.
As a result of that news, price targets went up, and Apple shares set new records. These records are obviously handy, of course. That’s not what it’s about.
Well, fast forward to today. A few days ago, the equivalent Chinese sales data was published for July 2020. In response, we got Morgan Stanley singing the praises of how the iPhone finally got some installed base in China. We also got an increased price target and, of course, a new Apple altogether.
If we dig a little deeper, we will notice that this performance was achieved on a large (-34.8%) overall decline in smartphone sales in China during July. This was a remarkably weak number for smartphone sales in China, in fact. This is the largest smartphone market in the world, so other tech industry like half judges might get some sadness from this development.
What we didn’t get right away was how the iPhone had done. Implicit was that the iPhone should have done a whole lot better, of course, if no one would perform. But, did it?
I had trouble updating my models with the new, incoming, data. I was envious of just how well the iPhone had done, in China, in July. This is the result:
Source: CAICI monthly reports
I could not really believe my eyes. According to official data, the iPhone really did better than the general smartphone market in China during July. It did better by “just” falling by 29% -30% on the month.
Can anyone believe this? An 18.7% increase in sales in December 2019 is advertised as something fantastic (when in fact it happened on an empty basis). And yet a huge drop in sales in July 2020 will not be reported? No negative consequences? I mean, this enormous drop happened even in the framework of Apple selling the new, cheap, iPhone SE in China (against no equivalent in the 2019 base!). These sales are in units, so the iPhone SE should have a significant positive effect.
It is unbelievable and shows an extreme bias that these news were reported as something positive.
Moreover, although Morgan Stanley points to an increase in the installed base, it seems interesting that the Apple App Store download growth is back in negative territory (in China). This completely eliminates the COVID-19 impulse:
Source: Merrill Lynch
Indeed, the same “post-COVID-19” phenomenon occurs in many other cases in China:
- The growth of gaming hours has returned to pre-COVID-19 levels.
- E-commerce share loses 50% of COVID-19 momentum.
- DRAM and NAND spot prices are falling rapidly. It is therefore likely that COVID-19’s server and PC boost will also be discontinued (on top of the demand problem exacerbated by declining smartphone sales).
During FQ3 2020, Apple received a lot of profit from the COVID-19 stay “staying at home”, which seems to have helped the Mac and iPad sales. Possibly it even helped iPhone sales, although the launch of the iPhone SE was also a big factor. Apple itself also said that the massive fiscal stimulus was a factor (outside of China, and with it being the surest in the US).
Now, what we are seeing is that the iPhone has dropped a lot in China, and some of the other factors are declining as well. In the US, there is a race to provide more incentives, but the size of the new incentive program is likely to be much smaller than before. The additional unemployment benefits were already cut from $ 600 / week to $ 300 / week (paid from FEMA funds, temporarily).
All of these argue for strong moth winds for the coming quarters. Still, Apple performed brilliantly, and during the FQ3 2020 conference call, it led to the then favorable trends to move on to FQ4 2020. Such should not be discounted.
Conclusion
There are a lot of cruisers, and Apple has done very well.
However, it still amazes me that analysts and the media in a short time can applaud a + 18.7% iPhone sales increase in China for a single month, and then ignore a total month of a -29% iPhone sales on another month.
There is an enormous and excessive Bullish bias running through these markets, analysts and media.
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