On Thursday, Bank of America analyst Wamsi Mohan cut his rating on Apple stock to Neutral from Buy, citing a potential reset of Street profit forecasts due to less than brisk uptake of pricey new iPhone 14s. The call came after reports surfaced earlier in the week that the tech giant would slow iPhone production amid softer-than-expected demand.
"We expect material negative estimate revisions driven by weaker consumer demand (Services already in slowdown and we expect products to follow)," Mohan warned.
That downgrade prompted Mohan's colleague at BofA Vivek Arya to highlight the potential risk to shares of Apple's suppliers.
"We assess the potential impact of Apple unit cuts on semis vendors by analyzing historical Apple exposure to determine average selling prices per iPhone," Arya wrote. "We then reduce consensus iPhone unit estimates by a similar magnitude applied by our BofA IT Hardware team. Our analysis assumes cuts are incremental, though it is possible consensus already includes some weakness in outlook (and note potential for incremental upside from second half content opportunities)."
According to Arya, here are the top names in the Apple supplier ecosystem and their exposures to any Apple demand slowdown:
Moderate risk (1% to 2% sales downside): large-cap vendors Qualcomm (QCOM) and Broadcom (AVGO), each with about 20%-25% Apple sales exposure, and iPhone sensor suppliers Coherent (COHR) and Lumentum (LITE), with 5% and 15% sales exposure, respectively.
Apple stock is off by more than 7% so far this week, worse than the 2% drop for the Dow Jones Industrial Average. Year to date, Apple's stock is down by 20%.
Furthermore, the impact of a smartphone slowdown may not just be limited to Apple's products, Arya contended. That, in turn, could lead to a broader pullback for producers.
"Despite modest Apple cuts, China/Android handset weakness is having a more pronounced impact on the overall smartphone market," Arya explained. "In July, China mobile phone sell-in declined roughly 30% on a MoM/YoY basis, catalyzing BofA Global Tech team to lower CY22/23 smartphone unit declines to -12%/-3% YoY (vs. -10%/+1% prior). ... While Android impacts are broadly known (we highlight QRVO SepQ/DecQ guide on its FQ1 call, representing near $350 million miss), visibility remains limited, and length of corrections remains questionable, creating sustained downside risk."