The average EPS estimate from Apple’s sell-side analysts for fiscal 2016 and 2017 is $9.07 and $10.02, respectively. Tim Arcuri, Cowen’s analyst on the company, upgraded the stock from Market Perform to Outperform on Wednesday and raised his target price from $125 to $135. What stands out in his report is his fiscal 2018 EPS estimate that is much higher than the Street’s $11.01. (Note that I own Apple shares).
Steady as she goes until the iPhone 7s in the fall of 2017
Arcuri believes that investor expectations for Apple have bottomed, the iPhone 7 due in the fall of 2016 will benefit from the “echo” of the large number of iPhone 6’s and 6 Plus’ that were sold in 2015 that users may want to upgrade, OLED screens in 2017 generating iPhone unit growth and valuation provides a floor.
Arcuri’s modeling has Apple’s March quarter results toward the low-end of its $50 to $53 billion revenue guidance but that currency may provide a bit of help since the dollar weakened in February and March compared to January when the company provided its outlook. For the June quarter he believes that the supply chain has steadied and that the iPhone SE will help by a few million units (I think it should be higher than that given what looks like strong pre-orders).
He estimates that the iPhone install base that may upgrade will have increased from 249 million units a year ago to about 319 million when the iPhone 7 is launched. This could lead to 30 million more upgrades relative to the iPhone 6s introduction. The wild card is will there be enough excitement (meaning new features) to get users who have paid off their iPhone 6 (like I will have when the 7 is introduced) to re-up on the payment treadmill. The chart below details Arcuri’s estimates of the iPhone install base by model with estimates through the iPhone 8 in fiscal 2018.
OLED displays could allow Apple to increase the screen size while keeping the iPhone form factor the same. It may also allow the elimination of the physical home, lock and volume buttons and make them virtual. And we know that Apple prefers to have as few buttons as possible on its mobile devices.
Below is an image from a patent the company was granted in September 2015. As a side note since Samsung is a major supplier of OLED screens this may be another patent war between the companies even as it supplies screens to Apple.
Estimates jump in fiscal 2018
Arcuri’s fiscal 2017 revenue estimate of $233.6 billion is almost exactly the same as fiscal 2015’s $233.7 billion. While he expects gross margins to decline from 40.1% in fiscal 2015 to 39.3% in fiscal 2017 it looks like the company’s share buyback program will increase EPS from $9.22 in fiscal 2015 to $9.95 in fiscal 2017 (Street is at $10.02).
Where Arcuri separates himself is in fiscal 2018 with his EPS estimate of $12.39 vs. the Street’s $11.01. This is driven by a revenue projection of $268.4 billion (Street is at $253 billion) with iPhone shipments of 245.5 million, up from 222 million in fiscal 2017 (and 231.5 million in fiscal 2015). Apple’s Watch also helps as he has unit sales of 45 million in fiscal 2018, up from 35 million in fiscal 2017 and 6.5 million in fiscal 2015.
