In my previous article on Apple (NASDAQ:AAPL), I commented on how the iPhone saw extremely large sales growth in China, during January and February 2021.
These sales were happening in the context of a growing market, but Apple was gaining significant market share as well. The year-on-year numbers were astonishing, though obviously favored by the base period including Covid-19 effects.
However, March just came as a large surprise, and not a good one at that. Instead of a reasonable slowdown in growth, what I’m going to report next is truly a large downside surprise in sales.
This was what was reported (focus on March):
There are several significant observations to be made:
- iPhone sales actually turned negative year-on-year in March. This is highly surprising.
- The overall market slowed down, but still posted a very large growth year-on-year. The overall market was up +65.6% year-on-year in March, while Apple printed negative. Again, this is highly surprising.
- As a result of the market still growing very quickly, the iPhone lost market share. This was the opposite of what happened in January and February. Indeed, March went so badly that it made Apple lose share for the entire quarter (the overall market grew +100% year-on-year, while Apple grew +91% year-on-year).
- Growth for the entire Q2 FY2021 quarter still looked good, at +91% year-on-year. However, it’s hard to ignore the late quarter weakness. One wonders if this weakness will persist – or even if Apple gets back to growth, it will be at a much slower pace than before.
- Additionally, even if we compare the March 2019, we still see the iPhone as merely flat versus 2 years ago. And the observation that Apple lost share even applies versus March 2019 (~9.5% then versus 7.6% now).
There’s no other way to comment on March 2021, but to conclude that it was a very negative month for the iPhone in China. This was completely surprising, given how well the new iPhone 12 lineup was performing right until now.
It’s hard to understand what caused this sudden slump. There’s now the clear risk that exceptional iPhone growth in China won’t continue beyond Q2 FY2021. The only possible benign interpretation would be if Apple was affected by the semiconductor shortage.
Meanwhile, DRAM memory prices continued to be elevated but have stopped increasing. At the current levels, this and other components will constitute a headwind for Apple iPhone margins.
Another important event is that in April 2021 Apple laps the launch of the iPhone SE2 in China. The iPhone SE2 led to a strong April for Apple in 2020 (iPhone sales were up +45% year-on-year then), so that’s a much more difficult comparison base. Hence, the current March iPhone sales weakness looks set to linger for at least another month.
A final note, 5G smartphones already represented more than 3/4ths of all phones shipped in China during March 2021, so the 5G transition is mostly complete (in what concerns share of new phones sold).
Conclusion
March 2021 constituted a very large, negative, sales datapoint for the iPhone in China. April 2021 is likely to be bad as well, considering the difficult comparison base.
Q2 FY2021 was still very strong in China, so the risk of a miss doesn’t look high. However, the risk of weaker guidance seems real considering these developments -- though it depends on what’s happening across the world.
Higher component costs are likely to lead to margin pressure. Apple might also highlight this effect in its upcoming earnings report (Apple reports on April 28).
Given the risks highlighted, I’m turning slightly bearish into this earnings report and beyond, until we get a better picture of what’s happening to iPhone sales.
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