Apple confronting a ‘broader spending deceleration,’ analyst says

Bank of America Senior IT Hardware Analyst Wamsi Mohan joins Yahoo Finance Live to discuss the expectations for Apple amid a weakening in demand, supply chain woes, stock performance, and the outlook for the company.

Video transcript

- Stay in the world of tech. Next guest predicting a gloomy year for one company in particular, Apple. Bank of America Senior IT Hardware Analyst Wamsi Mohan downgraded the tech giant from buy to neutral, warning of weaker consumer demand. He joins us now, as you can see there on screen. And so as Dan was walking through Apple earlier just a moment ago here, Wamsi, as you think about some of the demand that has been spelled out, or at least we've been tracking at the higher end tiers of the iPhone, what does that mean for some of the other products for Apple over the course of this holiday season?

WAMSI MOHAN: Yeah. Thanks for having me. Good morning. So I think that as we look more holistically at the entirety of what's happening with consumer spend, the argument is being made that the high end consumer is very resilient, and hence Apple, which largely caters to the high end market, should also be commensurately resilient. The issue really that we see is that consumer spend is weakening even within Apple's own install base.

So when we look at data around what is actually happening in the App Store, for instance, App Store grew about four or five points in Q2. It's going to be down 2% and in Q3. And this is the install base of users catering specifically to Apple. So what's very clear is that this is not just some low end consumer problem. We have a broader spending deceleration that's happening across the broader swath of the ecosystem, particularly even for Apple.

So as we put that in context, both for iPhone, which we look at various lead time indicators and other elements, as well as look at what is happening with sell through as well as look at other products, we think that there is the potential for numbers to come down meaningfully, which is what we reflect in our downgrade as well as our estimate revisions, which are meaningfully now below the Street.

- How long, Wamsi, do you think that this consumer spending slowdown and deceleration could last and affect Apple?

WAMSI MOHAN: Yeah. Just to be very clear, Julie, this is not a call on the quarter at all. We think the September quarter is going to be fine. And December, Apple actually has one extra week. We should really look at the demand trends sort of ex that extra week in the December quarter to understand what is the trajectory further as you look into March and into June.

And we think the real problems start to emerge then in terms of just the weakening and the pace of change and consumer appetite for electronics. We already see high frequency data that's showing that these elements are slowing down. But I think that they come down at a moderate pace right now. But as we look into the first and second quarter of next year, that's when we see the most downside to estimates.

Now, that said, if you think about how long this weakness could spread, I think that's going to be a function of consumer confidence, broader Fed factors, what's happening with the broader economy, ETF inflows. I mean, there's a whole lot of things that we can look at and try to understand how long that might last. But we think it's at least a two quarter phenomena. So as we look into early part of next year, that's really where most of our concerns reside in terms of the disconnect between what consumers might be willing to actually pay and spend versus where estimates reside.

- Wamsi, this Apple slowdown you're talking about here via this downgrade, what are your fellow team members that cover the Apple suppliers, what are they saying? How big a risk would this slowdown be to them?

WAMSI MOHAN: Well, we have colleagues that cover the supply chain elements. And they all have their individual perspectives based on what's the exposure, how much exposure do they have to the Pro versus the non-Pro, how much exposure do they have to each individual specific product, and what's happening with market share? So there's a lot of nuance that goes into understanding how each of these suppliers really react.

But I think the bigger picture is that when you look at suppliers' stocks, they've typically pulled back a lot more than Apple has. And so a lot of-- some of the concern, at least, is reflected in that. I think there is some incremental risk that our colleagues have highlighted for these supplier stocks. Now, that said, the estimates really for Apple are the ones that have not really changed or moved much at all.

Like when you look at fiscal '23, the estimates for Apple, one year ago, right, when the world we'll all agree was in a very different place, was $6.55. And pre our downgrade, the estimates were $6.44. So $0.11 cost despite the fact the whole world around us has changed we think is unrealistic. And that's what we're reflecting in our numbers. And if we're right, I think that does impact suppliers as well.

- Bank of America analyst Wamsi Mohan with a big call on Apple. Good to see you. We'll talk to you soon.