Apple Inc. has fallen out of favour among investors in recent weeks, and the selloff could continue if the tech giant disappoints on Thursday, potentially bringing the broader market down with it.
When Apple reports first quarter results for fiscal 2018 after the bell, as is often the case, the market will be focused on the iPhone. Recent reports suggest Apple asked its suppliers to cut production of the iPhone X dramatically in response to weaker-than-anticipated sales.
Tim Long, a communications equipment and hardware analyst at BMO Capital Markets, is among those that believe Apple’s guidance for the current March quarter (Q2) will be well below consensus.
“We are more concerned by a secular change for iPhone,” he told clients. “Following 10 years where average sales prices (ASPs) have generally moved higher, we believe prices will plateau as with the rest of the industry.”
Long downgraded his recommendation on Apple to market perform from outperform, and cut his price target on the stock to US$162 from US$199, also forecasting no year-over-year growth in the China market. That would represent a sharp reversal from 12 per cent growth in Q4.
Apple deserves praise for successfully pushing prices higher, despite the flattening trend among others in the industry. BMO estimates that approximately 30 per cent of iPhones will cost more than US$900 this year. However, Long doesn’t see that figure going any higher, particularly since just 12 per cent of smartphones globally sell for more than US$600.
“We still view the iPhone base as growing, and the devices are on average getting older,” the analyst said. “However, without a compelling product cycle in September, we may see a slow upgrade cycle once again.”
With this in mind, Apple’s recent share price performance looks somewhat like early 2016, when the stock languished. Later that year, however, when investors started looking ahead to iPhones with features such as OLED screen and Apple’s 10-year anniversary smartphone, the shares moved higher.
Unfortunately for Apple, that sort of catalyst is missing today.
“No such product is on the horizon now,” Long said.
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With Apple and other large U.S. technology companies having emerged as market leaders in recent years, they have also become equity bellwethers. As a result, any significant earnings disappointment has the potential to spook investors already nervous about the current bull market’s lengthy lifespan.
The Dow Jones Industrial Average suffered its biggest loss in eight months on Tuesday, and Apple shares have declined about seven per cent in the past two weeks.
Analysts do see the possibility for Apple to produce an upside surprise in its services business, and some other products. Management could also discuss rewarding shareholders with a more robust capital return program, since the company is now able to repatriate its more than US$250 billion in cash held offshore. However, the positives may not be enough to offset a substantial iPhone miss.
Amit Daryanani at RBC Capital Markets also expects “tepid” Q2 guidance, but doesn’t foresee it being anywhere near the levels some fear. The analyst believes investors are ignoring ASP tailwinds that could more than offset concerns about iPhone sales, and allow guidance to end up in line with forecasts.
“Simplistically, Apple’s earnings per share/free cash flow (and stock) should continue to work higher driven by higher iPhone ASP, potential for gross margin tailwinds, and tax reform benefits,” Daryanani said in a research report.
The analyst raised his Q1 estimates, but lowered his Q2 forecasts to reflect the expectation that iPhone channel filling with Apple’s partners could have occurred sooner than anticipated.
“The ‘noise’ levels are rather high even for an Apple EPS call as investors try to digest the supply-chain commentary and its implications,” Daryanani said, noting that iPhone units, particularly in China, will be a focal point.
However, he thinks China will surprise to the upside, as Apple’s new iPhone offerings should be able to offset broader weakness in that market.
“While investors have been debating about implications/drivers behind short lead-times for iPhone X, we think this reflects supply chain bottlenecks being alleviated versus tepid demand for iPhone X,” the analyst said.
While surveys done by Canaccord Genuity suggest iPhone X sales were strong during the December quarter, things appear to have slowed since, to levels more in line with typical seasonal trends.
Analyst T. Michael Walkley anticipated that iPhone X supply would not meet demand until well into the March quarter, suggesting Q2 would be a strong one. However, since supply met demand by the end of the December quarter, and 2018 kicked off with more normal seasonal demand, Walkley boosted his Q1 iPhone estimates (to 80.6 million units from 78.5 million), but cut his Q2 forecast (to 59.9 million from 66.0 million).
“Despite our lowered near-term estimates, we believe our calendar 2019 estimates could prove conservative as new iPhones could drive a stronger replacement cycle than the initial iPhone X versus our current estimates anticipating a modest slowdown in 2019 upgrade sales,” the analyst said. “Further, with Apple’s cash repatriation, increased capital returns and especially stock repurchases could also create upside to our estimates.”