Why Apple Stock Has Upside As iPhone Seen Beating Expectations

Despite the generally bearish outlook on Wall Street towards Apple Inc. (AAPL), some are optimistic as the company’s newest line of iPhones get set to hit stores. Pre-sales of the iPhone 11 and its Pro and Pro Max versions are already showing signs of strength after being unveiled last week, and the release of the latest version of the iOS mobile operating system could force users of older iPhones to upgrade, according the The Wall Street Journal.

“We think there is inherent upside to Sept-qtr EPS given AAPL isn’t staggering their launches but announcing all the three products simultaneously,” Evercore ISI analyst Amit Daryanani wrote, according to Barron’s. “This we think will have a positive impact to revenues and EPS in the sept-qtr.” He recently reaffirmed his Outperform rating for Apple’s stock and raised his price target from $238 to $247, a price forecast also held by Morgan Stanley Katy Huberty and which implies an upside of 13%.

What It Means for Investors

Shipment times on several models of iPhones have already been extended out to the middle of October, suggesting strong pre-sale demand for a phone that is supposed to act as Apple’s placeholder until the company launches the more hyped-up 5G device next year. That strong demand is fuelling some of the optimism.

Another positive catalyst is likely to be the fact that the new operating system will be the first one that is incompatible with the iPhone 6, which was first launched five years ago. That means iPhone users, content with their old phones and holding off upgrading to newer models, may be forced into purchasing a new phone in order to avoid living with outdated software. Those that opt for the new phone will provide another boost to total iPhone sales.

But even that boost won’t prevent Apple’s iPhone revenues from declining for its 2019 fiscal year, which closes at the end of this week. Consistent with his expectations for strong sales of the iPhone 11, Daryanani’s 10% year-over-year forecasted decline is less pessimistic than consensus estimates that run anywhere from declines of 12% to 15.1%.

Looking Ahead

If sales of the iPhone 11 can beat expectations, it could help prevent total iPhone sales from declining next year. FactSet is currently expecting iPhone sales to decline 1.5% during fiscal year 2020, which would mark the first consecutive-year decline in the phone’s sales since being introduced 12 years ago. That’s one reason there are still plenty of bears.