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Apple’s iPhone production challenge may be short-lived

Yahoo Finance Live anchors discuss Evercore’s adjusted iPhone revenue estimate.

Video transcript

[AUDIO LOGO]

JULIE HYMAN: Well, Stephen alluded to Apple diversifying its iPhone fabrication this morning. Evercore is revising its iPhone revenue estimates to reflect the impact that these headwinds in China will have on Apple. The firm lowered its December quarter iPhone revenue estimate by $8 billion but increased it for the March and June quarters. And that reflects, guys, what we've been seeing broadly from the analyst community, which is that they expect this to be a short-term hiccup for Apple. And then it's gonna, they say, make up when we do get the eventual reopening. They're going to make up for that production.

BRIAN SOZZI: Yeah, but you're still seeing-- it is amazing to see this estimate cut. You saw Dan Ives over at Wedbush yesterday cut his estimates. And you still see Apple shares 24 times forward earnings, priced for perfection. The stock remains trading at a higher market multiple, just on the assumption that Apple's defensive stock. But I think you see news like this and you realize maybe it's not as defensive as you would think.

Now, the second thing here worth noting from this note is that the problems in China might cause Apple to diversify away from China in terms of making its phones, according to Evercore. That might have been looking at India, Vietnam, and other parts of the Asia-Pacific region. The problem with that, that might raise Apple's costs and impact their profit margins.

BRAD SMITH: Well, what they're pointing to on this note as well is the Zhengzhou site, and particularly, this is known, as they had kind of pointed out within this, as iPhone City. And so for that production that Apple has relied on now for years here, they're estimating now from Evercore that the site accounts for about 75% of global iPhone shipments. And this time around, the production was heavily skewed to the higher end models, Pro and Pro Max.

Now, what we've continuously heard is that there is more demand for the higher end iPhone models, at least in this go-round. But the larger question is, even if you do have-- and to Wedbush's point yesterday-- even if you do have some of the backlog, perhaps, in ability to actually produce any of the iPhone models, then it comes back to, OK, all right, where does some of the demand dynamics get thrown off if you're now pushing out that cycle a little bit, furthermore, as well?

And so I think that particularly within how they're reliant on that Zhengzhou site dynamics, that could potentially throw off some of the ability to produce and then at least meet some of that demand that they're seeing right now this holiday season.

JULIE HYMAN: And, BS, you're question, whether iPhone-- Apple is still defensive. Evercore thinks it's still defensive. They still have an outperform rating on the stock.

BRIAN SOZZI: Kept it at outperforming.

JULIE HYMAN: They might be revising the revenue forecasts, but it just pushes it off. It doesn't eliminate-- like, those iPhones are still going to get made.

BRIAN SOZZI: A downgrade on Apple is such a rarity on the Street. And it's just remarkable. I think-- sure, I mean, it's Apple. They have this service revenue. But still, here's something fundamentally changing in this story, and the Street is not moving on it. And you have to wonder what will take the stock down?

BRAD SMITH: Well, it's if they miss a critical holiday season cycle too, because there's so many people that are looking across the different options for-- it's really just a camera that you're carrying around in your pocket at these days, and Google has run away with some of the best dynamics for the camera phone, or the smartphone.

But for Apple, the ecosystem that they still have, if they miss out on a critical holiday season, where even at some of the higher end models-- if you do have an affluent consumer that is still willing to spend on that higher end model, if you miss out on that holiday season, then what does that mean in terms of messing up the broader cycle? And we've talked about that with Dan Ives before, just about where the supercycle even stands or goes forward from here.

BRIAN SOZZI: I love how Dan called it on the show yesterday. This situation is like a gut punch to Apple. I would take it as a punch to the face just to counter Dan's argument there.

BRAD SMITH: Mike Tyson said everybody has a plan till they get punched in the face. Yeah.

JULIE HYMAN: That a a big counter. Counter. There's one underperform on Apple, by the way, from Itaú, the Brazilian bank.