Merrill Lynch‘s Scott Craig today waded into the debate over Apple‘s (AAPL) iPhone outlook following several estimate notes yesterday from others on the Street both cutting estimates and defending the stock.
Apple shares today are up $11.32, or 2.2%, at $530.15.
Craig, reiterating a Buy rating on on the stock, and a $720 price target, writes that the “recent selloff on supply chain concerns” is “overdone.”
Reports of cuts in component orders for the iPhone 5 are “inventory adjustment and not a sharp drop in end-demand,” he argues.
Craig draws upon the findings of his colleague Robert Cheng, who covers Asian components suppliers and contract manufacturers, which suggest that any cuts were among suppliers “upstream” of the iPhone manufacturing process, and that Apple may have “double-ordered” screens for some devices, leading to the adjustments Craig mentions:
In Taiwan, most of the noise over Apple�s iPhone order cuts is mainly coming from the panel side. Our checks with system and mechanical parts makers did not show any changes and we still expect around 40mn iPhone 5 in 4Q12 and a inline seasonal drop in 1Q13. In addition the PCB, cable, and connector component makers are also likely to see an in-line seasonal drop in C1Q13, and visibility beyond March is low. We believe there is around a 1-2 month lag between upstream and system makers. Also, expectations that the next generation iPhone will arrive in 1H13 raise concerns over inventory/component adjustment. However, we think the most likely timetable for the next iPhone is early 3Q13. Besides panels, some upstream components like passive components or lenses will likely to see peak shipments in 4Q12 and a sequential decline in 1Q13, in our view. This is mainly due to its adequate build-up and lower inventory carrying costs. Korea data points: No drastic order cuts yet. Most small-cap names have addressed a higher degree of order cuts from Apple than the larger companies. We note Hynix‘s minimal suffering (a matter of market share gains in our view) vs LG Display (a higher degree of softening due partially to market share losses to Sharp). That said, we do not yet see drastic order cuts for Korean chips and panels (eg, more than a 50% decrease is unlikely even for 1Q13). We prefer Hynix (new growth coupled with China OEMs) and SEMCO (low exposure to Apple; benefit from Samsung’s growth).
Nevertheless, Craig did cut his iPhone unit sales estimate for fiscal 2013 to 162 million from a prior 170.5 million units, citing “a tepid US/Europe consumer and aggressive promotions at US retailers.”
He now models revenue for the fiscal year of $192.05 billion and EPS of $50.22, down from a prior $197.05 billion and $52.45.
Here’s Craig’s quarterly shipment model for iPhone:
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