Mizuho Securities Apple analyst, Abhey Lamba, downgraded the shares from Buy to Neutral and Pacific Crest’s Andy Hargreaves reiterated his Sector Perform rating last week. These are in contrast to Credit Suisse’s recent upgrade to Buy with a $130 price target. Lamba has a $115 price target and Hargreave’s sees fair value of $103 (but for some reason does not have an official price target). Both are expecting “extremely solid” and “in-line” results for the December quarter, respectively. (Note that I own Apple shares).
Slower or potentially declining iPhone growth rates are the biggest concern
Lamba’s main concern is that the iPhones growth rate could decelerate faster than normal later this year. He and others like Hargreaves are correct in that it will be very difficult (pretty much impossible) to match the December 2014 and March 2015 quarter’s growth rate (due to Apple’s lack of having larger screen iPhones until now).
It may turn out that the iPhone unit growth rate could be negative late this year or in early 2016 but it will be at a higher level than ever before, generate a lot of cash and provide a platform for other revenue streams such as Apple Pay and Watch (but I do agree those may not generate “move the needle” numbers for a few years).
Apple’s Watch could be slow to gain traction
I believe that investors should not get excited about the financial impact of Apple’s Watch. While 20 million units at $400 each does generate $8 billion in revenue (adds about 4 points to revenue growth) it will be a distant fourth to the company’s iPhone, Mac and iPad businesses (and the company may not hit 20 million in the first year). Lamba’s supply-side checks indicate that the Apple Watch build plans are significantly below the 15-25 million unit expectations.
Lamba believes that the positives from a very strong December quarter, significant backlog of iPhone demand, high gross and operating margins, an increased dividend in April and continuing to buy back shares are already built in the stock price. His target price range is mid-$80s to the downside and $130 to $140 on the upside so that overall his downgrade to Neutral is based on the risk-reward being balanced and is more long-term in nature.
Lamba’s fiscal 2015 EPS estimate of $7.45 is significantly below the Street’s $7.81. He is expecting the second half of Apple’s fiscal year earnings to come in substantially below the Street since he is under the average by $0.12 in the first half and $0.24 in the second half.
Hargreaves sees upside to iPhone sales but below expectations
Hargreaves sees iPhone upside to his 63.4 million unit forecast but does not see Apple reaching the 65 to 70 million expected by buy-side analysts. He is expecting March quarter’s guidance to imply 50 million iPhones with sales being pulled forward from future quarters and that market saturation will limit upside demand. Note that his average selling price (ASP) for iPhones in the December quarter is $660 which is up only 3.6% from last years $637 even though memory and the 6 Plus’s pricing should lead to ASP’s higher than his estimate (I’m currently at $700 with it to be reviewed this week).
His fiscal 2015 and 2016 revenue estimates are $210.7 and $207.7 billion, respectively (down 1% year over year) and EPS of $7.89 and $7.92, respectively, up less than 1% year over year (driven by stock buybacks since operating income is down year over year). It is interesting to see that Hargreaves is projecting fiscal 2015 EPS of $7.89 with a $103 fair value while Lamba is expecting $7.45 and has a $115 price target.
