What Wall Street Analysts Are Saying About Apple's Ugly Quarter

Consensus: The next three quarters could be the most important of Apple's history.

Apple Feeling Pain at the End of the iPhone 6 Cycle

After 51 consecutive quarters of uninterrupted sales growth, one word was conspicuously absent from the headline of Apple Inc.'s latest earnings release: "Record." As in, no new sales record for the company's flagship products. The tech giant is having a tougher time selling everything from MacBooks to its main revenue driver, the iPhone. 

Rumors of struggling sales have been dominating the conversation around Apple for the past few months, so analysts were largely expecting a decline in the iPhone's numbers. However, guidance for the upcoming quarter also fell far short of expectations. Prior to the earnings report, the shares had already fallen about seven percent from a 2016 high made less than ten sessions ago. They're set to shave off another 7.5 percent when the market opens on Wednesday.

Here's a look at what some of the analysts on Wall Street have to say about the latest report: 

Deutsche Bank's Sherri Scribner, Adrienne Colby, and Jeffrey Rand don't recommend buying the stock right now. They maintained their hold rating and price target of $105.

"Our concerns about slowing smartphone market growth and elongating refresh cycles were reinforced by iPhone units, which declined 16 percent year-over-year in the quarter...Positive risks: stronger-than-expected smartphone sales and share gains, higher margins, and faster ramp of new product. Negative: slower smartphone sales, market share losses in smartphones, and slower growth in Services."

Barclays' Mark Moskowitz, Trevor Bacon and Daniel Gaide are worried about Apple in the near term, but find a silver lining and remain overweight shares.

"We expect shares of Apple to be under pressure near term. We had been concerned the stock’s recent 'hope rally' overlooked the potential of more air pockets in the model, due to tenuous smartphone demand. Reality set in on Tuesday. Missing our recently lowered estimates, Mar-Q results and Jun-Q outlook upended any notion of the model bottoming. The silver lining is any near-term downdraft in Apple’s stock could grab the attention of large long-only funds that trimmed positions in late 2015, early 2016."

William Blair's Anil Doradla, Joe Hodes, and Maggie Nolan were in the optimistic crowd. They have an outperform rating, but no price target was given.

"We believe that while the Street will not be pleased with second-quarter results, investors will be incrementally concerned with third-quarter guidance. In our opinion, the guidance implies iPhone units in the range of roughly 37 to 40 million units, far below Street estimates of 44.1 million units entering the quarter. We believe that Apple has been negatively affected by the ongoing headwinds in the mobile industry, weaker-than-expected results in China, and an elongated upgrade cycle in comparison to the record results set by the iPhone 6. Going forward, the key questions for Apple investors will be whether the user base will slow down the upgrade cycle permanently and/or whether ongoing headwinds in China will continue to hinder iPhone sales."

Wells Fargo's Maynard Um, Munjal Shah, and Jason Ng were also optimistic and said this dip is a great time to buy. Outperform rating and price target range of $120-$130. 

"Analysis suggests now would be the time to get more bullish on AAPL shares. There is no question that decelerating iPhone growth (in part due to inventory destocking) combined with declining gross margins, under most circumstances, should be a cause for concern, which we think is why AAPL shares are down 8% in the aftermarket. However, our units per carrier analysis suggests that investors should get bullish around the iPhone 7 cycle as every non-S cycle sees a higher units per carrier versus an S-cycle and typically sees an increase non-S to non-S cycle."

Pacific Crest Securities' Andy Hargreaves and Evan Wingren indicate that Apple's fiscal third quarter guidance isn't as bad as the headline figures suggest. Overweight rating, price target revised to $123 from $127. 

"Apple suggested the channel inventory reduction would be at least $2.0 billion, which is approximately $1.3 billion greater than we had estimated. This accounts for roughly half of the gap between the high end of the company's revenue guidance of $43.0 billion and our FQ3 revenue estimate heading into the quarter of $45.7 billion. We believe Street estimates, which were above ours, anticipated iPhone demand levels that were simply too high. The remainder of the gap between Apple's guidance and our estimate appears to be spread relatively evenly between iPad, Mac and Apple Watch, with no particularly alarming trends in any of these categories…

Additionally, we believe the planned channel inventory reduction almost fully accounts for the weaker-than expected gross-margin guidance. After adjusting units and iPhone product mix in our model, our gross-margin estimate was in line with the high end of Apple's guidance. This suggests the company is not anticipating a material degradation in margins at the product level and, importantly, also suggests that margins can rebound once channel inventory has been normalized."

Stifel Nicolaus & Company's Aaron Rakers and Sanjiv Wadhwani note that judging by AT&T and Verizon's results, the upgrade rate for smartphones has fallen to a multi-year low. Buy rating, price target of $120.

"Apple’s F3Q16 guide leaves us to now estimate iPhone ship of ~39.7M (vs. prior 42.8M est.; street at ~44.0M), which reflects an expectation that high-end iPhones will account for the “vast majority” of Apple’s anticipated ~$2B channel inventory burn-off…

Quick Derivative Note: Verizon + AT&T Smartphone Upgrade Rate at Lowest Level since Mid-2012 (per Stifel Calculations). With AT&T reporting results tonight, we would note that our calculation on the C1Q16 postpaid smartphone subscriber base upgrade rate was ~7.4%, or the lowest level since mid-2012. This follows our similar analysis on Verizon’s resultslast week from which we calculated a C1Q16 installed base upgrade rate of approximately 5.7% (lowest since C3Q12). On a combined VZ + AT&T basis, we would calculate the upgrade rate at 6.3% in C1Q16, the lowest intra-quarter subscriber base upgrade rate seen since C2Q12."

Credit Suisse AG's Kulbinder Garcha and Achal Sultania think growth in services will make Apple less of a smartphone company going forward. Outperform rating, price target of $150.

"We see material potential for Apple's Services business, as evidenced by the accelerating installed base related services revenue growth (gross basis) this quarter of 27 percent, driven by App Store growth (+35 percent) and an inflection in Apple Music revenues, with management noting that GM (on a net basis) here was significantly higher, and further supporting our long term view that this part of Apple's business can grow from 15 percent of gross profit to 30 percent longer term…Acknowledging near term weakness, we believe this reset provides an opportunity and we see a trough valuation on a P/E ex cash basis of 8.5x, suggesting support at $95."

Morgan Stanley's Katy Huberty suggests that Tim Cook might go on a buying spree. Overweight rating, price target revised to $120 from $135.

"Capital return is as expected though M&A commentary more interesting…We expect the company to launch more subscription services, potentially through acquisitions, which Apple sounds more open to. We think the company has both the appetite and financial flexibility to spend more than the current record of $3B for Beats. We note that we have no knowledge of any potential deals…Given the mixed macroeconomic commentary and the slower upgrade cycle highlighted by both Apple and US carriers, we assume little improvement in the next two quarters."

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