Apple iPhone Levels Signal Component Correction Coming, Pacific Crest Warns

• Apple Inc. AAPL shares are up 8 percent year-to-date, although trading meaningfully short of their 52-week high of $134.54.
• Pacific Crest’s John Vinh said that the rising iPhone inventories point to a correction, and there is increased risk to component supplier outlooks for Q1.
• Vihn added that investor expectations already anticipated this risk to outlooks due to channel inventory.

“Our monthly U.S. carrier surveys indicate increased risk to component supplier outlooks for Q1, given increasing channel inventories,” analyst John Vinh wrote. The surveys indicated that most of the retail stores noted an improvement in demand trends in November, driven by increased traffic associated with Black Friday.

“Despite improving sell-through trends in November, we see increased risk of an inventory correction, as retail store inventory levels of approximately 4.5 days have reached levels that were not seen until five months after the launch of the iPhone 6,” Vinh said. Although inventory levels are below the target levels of 8-12 days, Apple could reach the targeted levels soon.

Samsung seems to be doing a better job at managing its retail channel inventories this year, along with promotional activity. GS6 inventories are currently at just above 6 days, below the targeted levels and below the inventory level with the GS5 last year. Note 5 inventories also continue to be healthy and below targeted levels. “As a result, we see limited risk of an inventory correction for the Samsung supply chain,” the Pacific Crest report stated.

While the surveys indicate increased risk of an inventory correction, investor expectations are already likely to have largely priced these concerns, Vinh commented. He cited the favorite handset plays as Analog Devices, Inc. ADI [PT: $70], ARM Holdings plc (ADR) ARMH [PT: $63], Avago Technologies Ltd AVGO [PT: $170], Maxim Integrated Products Inc. MXIM [PT: $39], QUALCOMM, Inc. QCOM [PT: $64] and Skyworks Solutions Inc SWKS [PT: $100].