Apple will publish its fiscal second quarter earnings on Tuesday, April 26, likely reporting its first year-over-year decline in sales in over a decade, amid a relatively tepid uptake for its new flagship iPhone 6S, economic headwinds in China (its second largest geographic market) and slowing global smartphone shipments (est. 7% in 2016 per Gartner). While the quarterly numbers could signal the end of an era of high growth for Apple, we will be closely watching its ability to manage average selling prices (ASPs) and margins – which remain key valuation drivers for the company.
We have a $135 price estimate for Apple, which is about 20% ahead of the current market price.
See Our Complete Analysis For Apple Here
iPhone Shipments Will Fall On Weak Demand For 6S, High Channel Inventory
iPhone shipments are expected to see their first ever year-over-year decline, amid a lackluster uptake for the iPhone 6S and a tough comparison with Q2 FY 2015, when Apple saw pent-up demand for its just launched large-screen devices. Apple shipped 61.2 million iPhones during Q2 FY 2015, and the number for this quarter could be meaningfully lower, since the firm actually increased iPhone channel inventory by about 3.3 million units over the holiday quarter compared to a decline of 0.2 million units in the same quarter last year. Competition in the high-end of the smartphone market has also been heating up, with Samsung choosing to release its latest flagship Galaxy S7 in March, a month ahead of its typical April upgrade cycle. The S7 has received very positive reviews, and according to Bloomberg News, Samsung may have shipped about 9 million units over the first month, roughly 3 times the shipments of its predecessor, the S6, over the same period.
Margins And ASPs In Focus
Apple’s premium pricing and thick margins remain the most crucial driver of the company’s cash flows, and investors will be closely watching to see if Apple is trading off its pricing power in favor of volumes. While Apple has indicated that iPhone ASPs were pressured by the strong U.S. dollar in fiscal Q1 (iPhone pricing would have been 7% higher in constant currency terms during Q1), the dollar actually remained fairly stable through Q2 on a trade-weighted basis. This could imply that any potential sequential changes in ASPs will be driven by Apple’s pricing strategy. That said, Apple has guided for margins of about 39.25% (mid-point) for the quarter, translating into its second-highest quarterly guidance in close to two years. Considering Apple’s track record of consistently beating the upper end of its guidance, it is quite possible that gross margins could exceed 40% for Q2 as well.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
