"We expect more significant price cuts on XR over the coming months," Ives said in a note out Monday morning, referring to the lowest-priced new iPhone. "Apple is facing a 'code red' situation in China and the right pricing strategy around XR and future versions will be key," he added.
Apple's stock fell 1.50% to $150 a share on Monday. The broader market was also down, with the tech-heavy Nasdaq down 0.94%.
Ives, who has a $200 price target on Apple, told TheStreet in an email that a China iPhone price cut "is key to the Street's bull thesis" and that Apple should "take their medicine with lower prices."
There are two main reasons Apple should cut prices in the country, according to Ives.
The first is that there is considerable smartphone competition in China. "With lower-priced competition from all directions with Huawei and Xiaomi front and center, Apple needs to make sure that over the next few quarters they do not lose any current iPhone customers," Ives said.
The second reason is that customers ultimately need to own iPhones in order for Apple to realize its full upside on services revenue growth. "[Price cuts are] a smart and necessary strategy for Apple as this is an installed base story going forward and core services growth will be driven off that premise for the next decade," Ives wrote. According to Ives, "this price cut move/strategy has already started based on data points out of China over the last week."
Not only is China one of Apple's most profitable regions, as TheStreet's RealMoney pointed out, but Wedbush estimates about 20% of all iPhone holders due for an upgrade are in China. About 350 million iPhone owners will soon upgrade, with 60 million to 70 million of those currently in China.
Apple shocked the market earlier this month when it announced its December quarter revenue would come in about $8 billion less than expected, and there were reports last week that it had asked suppliers to cut iPhone production by 10% because of weak demand.
Services revenue growth has actually decelerated of late as well. Morgan Stanley analyst Katy Huberty pointed out in a note out last week that services revenue grew 18.3% year-over-year in the December quarter, down from the 25% seen in the September quarter. This could be ultimately attributable to the slowdown in iPhone sales. "The services deceleration is more temporary in nature and largely attributable to AppleCare, which was impacted by the estimated 19% Y/Y decline in iPhone sales in the December quarter," Huberty wrote.
RBC Capital Markets analysts wrote in a note out Monday morning they also expect services revenue to grow at 18% for the December quarter, well short of Wall Street's expected 27% growth.
Huberty has a 12-month price target on Apple of $211 based on a 20% annual growth rate for services. Ives' price target is $200, representing 24% upside, which is based on a 17% services growth rate into 2020.
Apple shares are down almost 5% to start 2019.