Apple's iPhone sales are starting to stabilize in China, Morgan Stanley says (AAPL)

Skeptical iPhone user

  • China's demand for iPhones appears to be stabilizing according to data compiled by Morgan Stanley.
  • The iPhone's increased market share in China is due to cutting prices amid a weakening smartphone market in the country.
  • Apple earlier warned investors on fourth-quarter revenue, citing a steep drop in demand in China iPhone sales.
  • Watch Apple trade live.

iPhone demand in China, a key weakness driving down Apple's stock recently, appears to be stabilizing according to new research from Morgan Stanley analyst Katy Huberty. Apple shares gain more than 1% on Thursday.

"After losing share in 4Q18, iPhone installed base shows market share recovering after price cuts in early 2019," Huberty wrote. "Combined with stabilizing iPhone supply chain data points, we now see an upward bias to our iPhone estimates in the March quarter." 

iPhone China market share

Huberty lists four reasons for the stabilization, based on preliminary data compiled by Morgan Stanley:

  1. Apple gained market share over the past two months despite Chinese smartphone shipments hitting a six-year low in February as price cuts to the its latest model, the iPhone XR, provided a lift. The smartphone giant had lost market share in the fourth quarter.
  2. February was the first month since August that iPhone builds were not revised lower, signaling that inventories for the smartphones were no longer building.
  3. Build estimates are running ahead of forecasts for the first quarter, implying that sales forecasts may be conservative.
  4. Replacement cycles appear to have finally converged with personal computers, implying a stabilization of demand.

Huberty maintained her overweight rating and $197 price target — a 7% increase from Thursday's close.

Huberty's conclusion is aligned with that of UBS analyst Tim Arcuri, who last month posited the worst of the iPhone's demand issues are over. Arcuri also cited inventory and supply-chain data indicating that Chinese demand had stabilized.

Apple's shares slid 9% in January after the iPhone maker issued a rare revenue warning for the fourth quarter. The firm cited weakness in China iPhone sales as a key driver of the expected sales shortfall. The revenue warning was the first in 12 years for the company and led to a raft of downgrades by Wall Street analysts.

Apple was up 16% this year.

AAPL stock screen

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