As most of you hopefully know, Pierre Ferragu, who covers Apple at New Street, has had a phenomenal call on Apple’s iPhone sales falling short of expectations (see his downgrade to Sell HERE). He was right on 3Q volumes, and the call has been building into 4Q as Apple’s suppliers, one after another, warn of cancelled orders (details HERE).
Lower iPhone volumes may not be great for Apple, but they helped margins at the carriers in 3Q (see our US Wireless Trends report HERE), and we suspect they will help again in 4Q.
Pierre is calling for a mid-to-high single-digit drop in volumes year over year; higher than the decline seen in the quarter just reported. The benefit to the carriers in the US will be in the hundreds of millions rather than the billions of dollars, given the change in the subsidy model and the adoption of ASC 606, but it is still material.
The US carriers will have another EBITDA tailwind in the fourth quarter that doesn’t seem to be properly reflected in consensus expectations – the benefit from the adoption of ASC606 will increase to $1.5BN from $1BN, on our estimates. While most investors will adjust for the accounting impact when analyzing financial trends, it will make for strong headline numbers for EBITDA and EPS on earnings day.
EBITDA estimates look too low for all the US carriers and most significantly for Sprint, and for AT&T. AT&T is the stock we like least among the four in general, but they have low expectations and a low multiple playing in their favor as we go into year-end results. We expect T-Mobile to beat on EBITDA too, though we expect them to beat on adds by a lot more, and this will mute the margin benefit.
In 3Q the group gave most of the benefit back with free iPhones and other promotions. It remains to be seen whether the industry will give back the benefit again; the fourth quarter selling season, with all its promotions, will begin in earnest next week. Think how weak Apple’s volumes might be if the carriers in the US weren’t giving so many iPhones away for free.
In our US Wireless trends report (LINK), we posited the thesis that the revenue growth we have observed in wireless isn’t quite what it seems; while carriers are competing less on price, they are competing more on subsidies and promotions. For all but Verizon, EBITDA is stagnant despite higher revenues. Reported EBITDA numbers in 4Q will likely be stronger than they were in 3Q. We will have to adjust for the accounting benefit and for the tailwind from lower volumes to get a sense for what the carriers spent on acquiring and retaining customers.
Japan is another market where Apple has historically had 50% handset share. IFRS-15 will blunt the benefit from lower handset sales. Nevertheless, a 5% reduction in Apple volumes would boost operating income for the MNOs. KDDI would be our top pick to play the margin benefit of lower volumes (see HERE and HERE). In Japan, demand spikes in the March quarter, prior to the start of fiscal and student years which start in April.
iPhone volumes don’t matter much for carriers in Europe, where iOS market share is half what it is in the US, and IFRS15 would blunt whatever impact there is. Only in the UK is iOS market share close to 50%, but there is limited stand-alone way to play this mobile market as an investor.
For those of you that haven’t engaged with Pierre and his research, we would recommend that you do. We can’t imagine having a fully informed view on the companies he has focused on recently without having seen his work. That is particularly true of some of his more controversial calls on companies like Apple (LINK), Tesla (LINK), AMD (LINK), and Nvidia (LINK).
For the full weekly review and updated comp sheets, see HERE.
Full 12-month historical recommendation changes are available on request
Reports produced by New Street Research LLP. 52 Cornhill, London EC3V 3PD Tel: +44 20 7375 9111.
New Street Research LLP is authorised and regulated in the UK by the Financial Conduct Authority and is registered in the United States with the Securities and Exchange Commission as a foreign investment adviser.
Regulatory Disclosures: This research is directed only at persons classified as Professional Clients under the rules of the Financial Conduct Authority (‘FCA’), and must not be re-distributed to Retail Clients as defined in the rules of the FCA.
This research is for our clients only. It is based on current public information which we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Most of our reports are published at irregular intervals as appropriate in the analyst's judgment. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.
All our research reports are disseminated and available to all clients simultaneously through electronic publication to our website.
New Street Research LLC is neither a registered investment advisor nor a broker/dealer. Subscribers and/or readers are advised that the information contained in this report is not to be construed or relied upon as investment, tax planning, accounting and/or legal advice, nor is it to be construed in any way as a recommendation to buy or sell any security or any other form of investment. All opinions, analyses and information contained herein is based upon sources believed to be reliable and is written in good faith, but no representation or warranty of any kind, express or implied, is made herein concerning any investment, tax, accounting and/or legal matter or the accuracy, completeness, correctness, timeliness and/or appropriateness of any of the information contained herein. Subscribers and/or readers are further advised that the Company does not necessarily update the information and/or opinions set forth in this and/or any subsequent version of this report. Readers are urged to consult with their own independent professional advisors with respect to any matter herein. All information contained herein and/or this website should be independently verified.
All research is issued under the regulatory oversight of New Street Research LLP.
© Copyright 2021 New Street Research LLP
No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of New Street Research LLP.