iPhone Trends Going 'From Bad to Worse,' Longbow Research Says

Apple continues to struggle with iPhone demand, particularly in China, with trends going "from bad to worse," according to Longbow Research.

"Without iPhone demand acceleration on the horizon, we currently do not see any catalysts near term to drive significant EPS upside," wrote analyst Shawn Harrison. He affirmed his neutral rating on the stock and said the lack of a rebound in iPhone sales creates risk and shifts more focus to Apple's March 25 event, where the company is expected to introduce a video programming service and premium magazine subscription plan.

Shares of Apple gained as much as 2.1 percent on Tuesday and the stock was on track for its third straight daily gain. While the stock has rebounded 27 percent from a January low, and is currently trading at its highest level since December, Apple remains more than 20 percent below record levels reached in October.

Longbow's comments were echoed by UBS, which wrote that an analysis of government smartphone sell-through data from China suggested demand there was "still weak."

"The annual rate of decline for Apple iPhones in the month of February (down 67 percent y/y) is similar to the weakness in January and December months," the firm wrote to clients. However, this data is "neutral" for the stock, "as weak China smartphone is well understood as are iPhone struggles in China."

If anything, UBS added, "checks in the supply chain indicate a slightly better tone given recent price cuts."

Much of Apple's weakness over the past few months has been related to weakening demand prospects for the iPhone, particularly in China. In January, the company cut its revenue outlook for the first time in almost two decades due to this factor.

According to data compiled by Bloomberg, almost 20 percent of Apple's fiscal 2018 revenue was derived from China, and the iPhone accounted for 62 percent of revenue.

"Multiple iPhone price cuts did not stop China iPhone search trends from weakening further while February supplier sales were abysmal, decelerating on a year over year basis vs. January," Harrison wrote in a research note Tuesday. Of 42 Apple suppliers, he wrote, 37 of them "reported worse than seasonal sales" in February.

Harrison added that there was "weaker interest year over year" for iPhones, citing search data for both Google and China's Baidu. In February, Baidu iPhone searches were down 47 percent from the prior year, per his data.

Analysts are split on Apple's outlook with 22 recommending buying shares and another 22 recommending holding the stock. Just one firm has a sell rating. The average price target is $178, or slightly below where the stock closed on Monday. On Monday, BofAML upgraded the Dow Jones Industrial Average component to buy, forecasting "stability of supply chain order cuts" and a "large reversal of inventory overhang in iPhones."

Apple's second-quarter results will be released on or about April 30. Analysts expect the company to report adjusted earnings of $2.38 a share on revenue of $57.54 billion. These estimates indicate a drop of nearly 13 percent in profitability and sales falling 5.9 percent compared to the prior-year period.

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