By K C Ma and Bilal Hashmi
Apple (NASDAQ: AAPL) CEO Tim Cook should not pay attention to President Trump mistakenly calling him “Tim Apple.” What Cook should worry about is the whole array of problems that Apple has to deal with in the immediate future. A slowdown in China’s economy, the surge of China’s nationalism because of the trade war, forex-induced iPhone price inflation, and a longer update cycle all paint Apple a grim picture of iPhone franchise for quarters to come. For the dominating China issues, fellow SA contributor Robert Faulkner shared the news that Foxconn (OTC:FXCOF) reported its first two-month 2019 revenue at $344 million which is 60% below the average and will hit the record low level (Figure 1A). Being one of the larger Apple suppliers, Foxconn’s surprised revenue drop, albeit not significant in magnitude, may signal an early warning of the China slowdown that Tim Cook was referring to in late 2018. Therefore, it is the purpose of this post to get a glimpse of the extent of Apple’s China slowdown through Foxconn’s revenue outlook.
Foxconn’s Relevance to Apple
Specifically, Faulkner said, “In Taiwan, all public companies must report monthly revenue by the 10th of the following month to MOPS (Market Observation Post System). Foxconn’s February revenue was down 43% from January and -71% from February 2018. Taiwan Semiconductor Manufacturing Company (NYSE: TSM) was down 22% month to month and -6% year to year. Not good signs.” A good question to ask is why $866 billion Apple’s shareholders would care about $3 billion Taiwanese Foxconn.
As Foxconn is one of China’s largest manufacturers, its short-term outlook will inevitably provide an early signal of China’s future growth which has been pivotal to Apple’s future growth. Also, as Foxconn is one of Apple’s larger suppliers, its revenue growth will directly reflect the China and world demand for Apple’s products. Any way you look at it, Foxconn’s revenue is bound to correlate with Apple’s revenue growth (Figure 1C, $344 million is the 3-month equivalent revenue). This is why Foxconn’s future growth is an important indicator to Apple’s future revenue growth.
Based on the last 7 years’ history, Foxconn’s January and February 2019 exhibited an alarming pattern (Figure 1A). January’s $146 million and February’s $83 million were far lower than the over $1 billion revenue in the previous quarter (circled in Figure 1B). It is particularly disturbing that the Q1 2019 revenue is set to hit the lowest quarterly revenue level ever, or a 60% decrease below the last 7-year average of $922 million.
From Foxconn’s Revenue to Apple’s Revenue
In the past, there seemed to be a causal relationship between Foxconn’s revenue and Apple’s revenue, as Foxconn represents 10.29% of Apple’s cost of goods sold. The relationship may be due to the fact that Foxconn’s revenue change indicates Apple’s cost change, which reflects the world demand change for Apple’s product. In fact, whenever Foxconn’s revenue changed by $100 million, it would be associated with a $6 billion change in Apple’s revenue (Figure 1C).
As Foxconn derives 27% of its revenue from Apple (Bloomberg supply chain data), Foxconn’s stock tends to move with Apple’s stock (Figure 2), although Apple has outperformed Foxconn in recent years due to its super cycle. It is more obvious for Apple than for Foxconn that both companies’ stock prices correlate with the revenue estimates. While Apple’s revenue followed new iPhone cycles, the stock generally moved with the trend but not with the cycle since it was already anticipated (Figure 2A). On the other hand, Foxconn’s stock price correlated less with its revenue estimates (Figure 2B).
Foxconn’s Revenue Impact on Apple’s Stock Price
Although Foxconn’s surprise revenue drop may be relatively insignificant in magnitude to Apple’s, its signaling of a future slowdown in Apple’s revenue is alarming. To Apple shareholders, the more important question is how Foxconn’s January-February revenue drop affects Apple’s stock prices. In this sense, I correlated Apple’s stock price with Foxconn’s revenue estimate and Apple’s revenue estimate. The correlated relationship suggests that Apple’s stock price should trade around $160, assuming future revenue growth is the main driver.
To explain the obvious disparity, Faulkner said, “Either Foxconn is going to have a blockbuster month of March or AAPL numbers are too high.” However, it is less likely that Foxconn will surprise the market with a blockbuster March, especially following a record low January and February. The more likely scenario is that Wall Street analysts have somehow underestimated Apple’s China impact.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.