Apple's Shares Took Two Body Blows But Are Recovering

On Thursday Goldman Sachs’ Apple analyst, Simona Jankowski, and ex- Morgan Stanley analyst now Kleiner Perkins partner, Mary Meeker, had negative comments on Apple’s iPhone outlook. Jankowski decreased her iPhone sales estimates which lowered her fiscal 2017 and 2018 revenue and earnings projections a decent amount but are still above Street forecasts. Her lower outlook led to cutting her price target from $136 to $124. Mary Meeker released her annual Internet Trends presentation and on slide 133 she postulates that iPhone sales may have peaked. (Note that I own Apple shares).

Apple’s shares were down $0.74 or 0.75% on Thursday while the S&P 500 and NASDAQ were up 0.3% and 0.4%, respectively, on the negative news flow. Its stock is up about 0.2% on Friday while the S&P 500 is down 0.5% and the NASDAQ is trailing at 0.8%.

Fewer units and lower ASPs drive Goldman’s changes

While Jankowski’s fiscal 2016 estimates changed slightly it was fiscal 2017 and 2018 that took the brunt of the hits. Her iPhone unit estimates went from 212 to 211 million in fiscal 2016 (she has consensus at 210 million), fiscal 2017 was lowered from 243 to 231 million (vs. consensus of 222 million) and fiscal 2018 dropped from 251 to 223 million (note the drop from fiscal 2017 and below consensus of 234 million).

Based on detailed analysis on Apple’s iPhone sales in North America, China, developed and emerging markets she expects the iPhone’s ASP (average selling price) to decline by 3%, 3%, and 1% in fiscal 2016, 2017 and 2018, respectively. This is driven by lower priced iPhone SE’s and its successors in emerging markets which caused the following changes in her EPS estimates.

• Fiscal 2016 from $8.40 to $8.39 (consensus at $8.29)
• Fiscal 2017 from $10.53 to $9.70 (consensus at $9.06)
• Fiscal 2018 from $11.42 to $10.19 (consensus at $9.48)
  • It is a bit surprising that Jankowski’s 2018 EPS outlook is a fair amount above consensus with her iPhone unit sales above consensus

Her $124 price target is based on a 12.5x PE multiple on calendar EPS of $9.94. The multiple is in the middle of Apple’s 5-year 10x to 15x PE range and is 10x after the company’s excess cash is taken into account.

Meeker’s slide hints at Peak iPhone

Mary Meeker released her 213 slide 2016 Internet Trends presentation at the Code Conference which shows iPhone sales falling in fiscal 2016 which shouldn’t be a surprise to anyone following the company.

The big question is can iPhones and especially Apple as a company return to growth in fiscal 2017 and beyond. The two key factors to accomplish this are the iPhone SE and services continuing to grow at a high-teens rate.

It is interesting that on the same slide Meeker has Amazon’s Echo selling about 3 million units over the past year. With an ASP of $180 it has generated about $540 million in sales. This compares to Apple’s Watch which I estimate has sold about 12.5 million units in the same timeframe generating revenue of approximately $6 billion. Even though Apple’s Watch revenue is 10x Amazon’s Echo the Watch is viewed as a flop while the Echo is a success. Go figure.

To get a summary of Apple’s recent investor oriented news check out my “Apple Investor Weekly”. You can find last week’s Weekly here. 

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