The iPhone 7 won’t even be unveiled for another couple of months, but already it is having a massive impact on Apple Inc. (NASDAQ:AAPL) stock. Most analysts seem intent on painting it as a positive, although many agree that it probably won’t be as big of a draw as next year’s model, which many are referring to as the iPhone 8. After all, any iPhone should do better than the iPhone 6s, right?
AAPL – Longbow initiates coverage of Apple
In a report dated July 6, Longbow analysts Shawn Harrison and Frank Carson initiated coverage of Apple stock with a Buy rating and $125 price target. Their checks suggest that production for the iPhone 7 is flat with that of the iPhone 6s and that there’s upside to expectations in demand for the iPhone SE. Google Search Trends suggest that interest in the iPhone 7 is better than it was for the iPhone 6s but not as strong as it was for the iPhone 6.
They’re now expecting the iPhone installed base to expand to 710 million in fiscal 2016, which would be an increase of 110 million year over year. They add that this growth provides a tailwind for the iPhone 7, which is expected to be only a small update from the 6s. It also broadens the base of devices Apple can monetize, noting that sales of services to the installed base grew 21% year over year in the first half of the year to reach $10 billion. They estimate more than $10 billion in incremental gross profits if Apple’s services sales growth from fiscal 2016 to 2018 matches their estimate for growth in the installed base.
The Longbow team believes Apple stock is undervalued as they expect iPhone demand to stabilize and view the growing subscriber base as a growing opportunity for monetization.
AAPL – Citi warns about lengthening iPhone replacement cycles
Their report comes a day after Citi analyst Jim Suva slashed his estimates for Apple because of a pause in demand due to Brexit-related macro uncertainty, volatility in currencies and lengthening replacement cycles. He adds that the average replacement cycle is now 28 months, while it was about 24 months in calendar year 2013. In fact, he thinks replacement cycles could extend even further out to between 30 and 36 months, which could be why Apple is moving to a three-year major upgrade cycle for the iPhone, if the rumors are true.
Suva estimates that Apple sold 40.3 million iPhones during the June quarter and that it recorded $41.2 billion in sales. He estimates a gross margin of 38% and $1.35 per share in earnings. Consensus estimates suggest $42.2 billion in sales, 40 million iPhone units, a 37.9% gross margin, and $1.40 per share in earnings. The iPhone maker guided for between $41 billion and $43 billion in sales, a gross margin of 37.5% to 38%, and implied earnings of $1.30 to $1.42 per share.
For the September quarter, Suva estimates $45.4 billion in sales, a 37.8% gross margin, and adjusted earnings of $1.54 per share. The consensus estimates for the September quarter are $46 billion in revenues, a 38.5% gross margin, and earnings of $1.65 per share.
AAPL stock to remain range-bound
The Citi analyst expects Apple stock to remain range-bound over the summer which is usually seasonally slow as the markets pass the time until the iPhone 7 launch. He believes investors will begin looking beyond the current weakness in the iPhone maker’s stock price to the iPhone 7 launch. He also expects investors to realize that expectations have become tempered as the consensus for iPhone units in the December quarter sits at 75 million, which is about flat with last year. Suva has a Buy rating and $115 price target on the iPhone maker’s stock.
Apple stock declined by as much as 0.28% to $95.26 during regular trading hours on Wednesday.
