After warning investors that a decline in iPhone demand is a risk to the stock, Apple's (AAPL -1.51%) worst-case scenario now appears in sight. After years of posting strong year-on-year iPhone revenue growth, the company only grew iPhone-related revenue 0.9% last quarter. Compared with earlier growth rates in excess of 50%, this represents a significant slowdown for the company:
Apple's forward guidance is even worse: Overall, the company expects revenue in the range of $50 billion-$53 billion, an 11.2% year-on-year decrease at the midpoint from the $58 billion the company pulled in last year's corresponding quarter. While Apple doesn't give guidance of specific products, Apple CEO Tim Cook did acknowledge the company expected iPhone unit shipments to decline in its second fiscal quarter.
As a result, investors have mostly baked in unit declines into the company's valuation, with shares down 25% from that initial warning during 2015's third-quarter earnings. But could the market be selling Apple short?
The strongest January since 2008?
According to Drexel Hamilton analyst Brian White, Apple had its best January since 2008. White bases his forecast upon supply chain analysis, by looking at Apple's host of manufacturers and assemblers in what Drexel Hamilton refers to as its Apple Monitor. Per the research note, "all of the companies in our Apple Monitor have reported January sales and the performance was much better than typical seasonality." Drexel Hamilton has a price target of $200 on the stock, leading to a valuation of $1.1 trillion using current shares outstanding.
Supply-chain analysis isn't a perfect indicator. In November, huge Apple assembler Foxconn (NASDAQOTH: FXCNY) reported third-quarter net-profit growth of 11% over last year's total, beating investors' expectations in the process. The strong performance didn't extend to Apple's quarter as the phone reported the aforementioned 0.9% revenue growth. There's also supply-chain data that conflicts with White's analysis -- a report from Reuters suggests that Foxconn will cut worker hours because of slowing iPhone sales.
Could the iPhone 5se be the reason for increased supplier activity?
Assuming White's analysis is correct, it's possible the increased activity won't show up in next quarter's results. Multiple reports say Apple will announce a new iPhone -- the rumored iPhone 5se -- a 4-inch entry-level model during its March event. Digitimes recently reports Foxconn will manufacture the model, and the increased activity a new product ramp requires would support White's thesis of a stronger-than-normal January.
If that's true, it's possible the iPhone 5se won't make a strong -- or any -- contribution to Apple's second-quarter results. Apple's event is heavily rumored to be in mid-March, while Apple's fiscal quarter goes through the end of March. Unless Apple is aiming to release the iPhone 5se around the time of the event, it's possible the majority of sales will be in Apple's third quarter. Cook's warning about iPhone unit contraction in the second quarter supports a third-quarter release.
But even if the iPhone 5se doesn't show up in the second-quarter results, it's an interesting proposition for Cupertino -- will the lower-end model introduce new users into Apple's ecosystem, flop amid incongruity with Apple's high-end user base (see: iPhone 5c), or merely cannibalize higher-margin, large-form-factor sales? It seems Apple's clearly betting on the former.