First of all, please don’t take this as a negative Apple (NASDAQ:AAPL) article. Sure, I think the stock is overextended, but what I’m going to write here is simply factual. I’ll show how the market has become incredibly biased in handling Apple news.
This will be easy to show. First, I’ll ask you to go back to January 9, 2020. At that time, great emphasis was given to Apple’s huge success in China. It had just been reported that, in the month of December 2019, the iPhone had grown sales in China by a whopping 18.7%. These were, for sure, the very signs of turning the corner in this so important market.
As a result of those news, price targets went up, and Apple shares set new records. These records have since been beaten handily, of course. That’s not the point.
Now, 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, finally, the iPhone had gained some installed base share in China. We also got an increased price target and, of course, a new Apple all-time high.
If we dig a little deeper, we’ll notice that this feat was accomplished on a large (-34.8%) overall drop in smartphone sales in China during July. This was a remarkably weak number for smartphone sales in China, by the way. This is the largest smartphone market in the world, so other tech industries like semiconductors might get some grief from this development.
What we didn’t immediately get was how the iPhone had done. Implied was that the iPhone should have done a whole lot better, of course, or no one would be celebrating. But, did it?
I took to the trouble of updating my models with the new, incoming, data. I was curious about just how well the iPhone had done, in China, in July. This is the result:
Source: CAICI monthly reports
I couldn’t really believe my eyes. According to official data, the iPhone really did better than the overall 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 gets advertised as something fantastic (when, in fact, it happened on a low base). And yet, a huge 29% drop in sales during July 2020 gets no mention? No negative implications? I mean, this huge drop even happened in the context of Apple selling the new, cheap, iPhone SE in China (versus no equivalent in the 2019 base!). These sales are in units, so the iPhone SE had to have a significant positive effect.
It’s straight-up incredible and shows an extreme bias that these news were reported as something positive.
Moreover, although Morgan Stanley is pointing to an increase in installed base, it seems curious that Apple App Store download growth is back in negative territory (in China). This fully wiped out the COVID-19 boost:
Source: Merrill Lynch
Indeed, the same “post-COVID-19” phenomenon is happening in many other instances in China:
- Gaming hours’ growth is back to pre-COVID-19 levels.
- Ecommerce retail share lost 50% of the COVID-19 boost.
- DRAM and NAND spot prices are sinking quickly. It’s thus likely that the server and PC boosts from COVID-19 are also fading (on top of the demand problem brought about by decreasing smartphone sales).
During FQ3 2020, Apple gained a lot from the COVID-19 “stay at home” boost, which seems to have helped Mac and iPad sales. Possibly, it helped even iPhone sales, though the launch of the iPhone SE was also a large factor. Apple itself also said the massive fiscal stimulus was a factor (outside of China, and with it being the most powerful in the U.S. for sure).
Now, what we see is that the iPhone sank a lot in China, and some of the other factors are also fading. In the U.S., there’s a race to provide more stimulus, but the size of the new stimulus program is likely to be much smaller than previously. The extra unemployment checks were already cut from $600/week to $300/week (paid out of FEMA funds, temporarily).
All of these argue for strong headwinds for the coming quarters. Still, Apple has executed brilliantly, and during the FQ3 2020 conference call, it guided for the then-favorable trends to continue into FQ4 2020. Such should not be discounted.
There are many crosscurrents, and Apple has executed very well through them.
However, it still amazes me that analysts and the media can, in a short while, applaud an +18.7% iPhone sales increase in China for a single month, and then wholesale ignore a -29% iPhone sales drop on another month.
There is a tremendously and excessively bullish bias running through these markets, analysts, and media.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.