Analysts are tepid on Apple after its first annual drop in revenue in 15 years

On Tuesday, Apple reported its first annual decline in revenue in 15 years.

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Its quarterly results beat Wall Street's expectations — but this is now the third consecutive quarter in which iPhone sales have declined year-on-year, and the company's stock dropped 3% in after-hours trading (to $114 from about $118).

Now the early verdict from analysts on Apple's quarter is in — and it's pretty tepid. Over the past six months, Apple analysts have gone from being largely bullish on Apple to merely somewhat bullish and, in a few cases, neutral. This is new territory for AAPL, long regarded as the stock you buy and hold forever.

apple ceo tim cook 2001
Apple CEO Tim Cook. Before Tuesday, the company hadn't reported a drop in annual revenue since 2001. Kevork Djansezian/Getty Images

Apple's growing services business is cited as a positive, as is the expected iPhone "super cycle," in which Apple is expected to return to growth with a blockbuster new smartphone in 2017 to celebrate the 10th anniversary of the device.

But downsides in analysts' research notes include the growing amount of time in mature markets between smartphone purchases and a "slower pace of innovation."

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For years, Apple was an industry darling, growing iPhone sales like clockwork and making record profits. But Western markets are pretty comprehensively penetrated, the Chinese market is slowing, and emerging markets like India aren't mature enough to be a real target for Apple's premium devices. 

Apple is the biggest company in the world, and some analysts and investors are now wondering whether it has any room left to grow. The lion's share of its revenue comes from the iPhone, a device first launched a decade ago, while sales of the Apple Watch — the company's latest hardware product line —are in free fall.

In an exchange on a call with analysts on Thursday, Apple CEO Tim Cook was put on the defensive after being bluntly asked: "Does Apple have a grand strategy for the next three, five years? I know you're not going to tell us, but do you have one?"

He responded: "We have the strongest pipeline that we've ever had and we're really confident about the things in it, but as usual we're not going to talk about what's in it."

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We've rounded up a selection of analysts' reactions to Apple's quarterly earnings, and you can read them below. But first, here are all the key numbers, via my colleague Kif Leswing:

  • Q4 EPS (GAAP): $1.67 a share, down 14.79% year-over-year (y/y), versus expectations of $1.65
  • Q4 revenue: $46.9 billion, down 8.93% y/y, versus expectations of $46.9 billion
  • Gross margin: 38%, down 4.76% y/y, versus expectations of 37.9%
  • iPhone unit sales: 45.5 million, down 5.3% y/y, versus expectations of 45 million
  • iPhone ASP: $618, down 7.7% y/y, versus expectations of $625
  • iPad unit sales: 9.2 million, down 6.8% y/y, versus expectations of 9.1 million
  • Mac unit sales: 4.8 million, down 15.7% y/y, versus expectations of 5.1 million
  • December quarter revenue guidance: $76 billion to $78 billion. At its midpoint, that guidance suggests 1.44% growth next quarter over last year.
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Macquarie Research: BULLISH

Rating: Outperform

Price target: $132

Comment: "Going into the quarter AND for long term, we continue to believe that the software and services at Apple are the most underappreciated aspect of the Apple story, particularly the App Store. With overall iPhone hardware sales relatively healthy, we expect investors to focus more and more on the trajectory of the services business. In fact, we expect management itself to highlight services and the App Store growth to investors."

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Citi: BULLISH

Rating: Buy

Price target: $130

Comment: "Apple reported September quarter results with sales slightly below consensus and EPS one penny above street expectations. December quarter guidance brackets consensus. Stock trading down -2% afterhours as Apple's gross margin outlook of 38%-38.5% is slightly below consensus at 38.8% which we believe is due to higher component costs (memory prices have increased)."

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Goldman Sachs: BULLISH

Rating: Buy

Price target: $124

Comment: "Key risks include product cycle execution, end demand, and a slower pace of innovation."

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Barclays: BULLISH

Rating: Overweight

Price target: $119

Comment: "We recommend that investors wait for the dust to settle in coming days. There could be some momentum-focused investors that decide to trim or exit positions on the notion that the Dec-Q goodness is not enough. After that, we think long-term investors could build bigger positions even if the Samsung-related benefit in Apple's numbers fades in 1H F2017, as the next mega cycle with IP8 is just around the corner (2H F2017), which has been our long-held reason for sticking with OW rating."

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William Blair: BULLISH

Rating: Outperform

Price target: N/A

Comment: "There were three key conclusions from Apple's fiscal fourth-quarter results. First, commentary and demand trends on the iPhone were solid, and over the next couple of quarters we expect Apple to benefit from improvements in component supply as well as Samsung's competitive issues ... Second, we were impressed by the strong growth in the services segment (up 24.4% year-over-year), which came in well above our and Street estimates (of 12.0% and 20% annual growth, respectively ... Third, while gross margin guidance came in slightly below our expectations (38.0% to 38.5% expected versus our estimate of 38.7%), we believe this is due in part to foreign exchange headwinds (management highlighted that there was roughly 340 bps of headwinds related to a stronger US dollar), and we believe that the company's ability to charge premium prices for best-in-class devices remains intact."

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Deutsche Bank: NEUTRAL

Rating: Hold

Price target: $108

Comment: "Expectations were high for iPhone sales heading into AAPL's F4Q-16 results, and while the company delivered an in-line quarter, guidance fell short of investor hopes. We believe the muted GM guidance was the primary disappointment, but OpEx was also higher than expected, leading to a more muted EPS outlook. Bulls will point to the strong services growth and easier compares as we head into FY-17, however we remain concerned about slowing smartphone growth and elongating refresh cycles in mature markets. Given the stock's recent move higher, we see current valuations as fully reflecting positive expectations and maintain our Hold."

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Wells Fargo: NEUTRAL

Rating: Market Perform

Price target: N/A

Comment: "We maintain our Market Perform as we expect limited multiple expansion given limited visibility to sell-through beyond Dec (risk of demand pull-in), potential for continued margin pressure, and, now, some risk of large M&A (management indicated it was open to M&A of any size that is of strategic value)."

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