Apple Inc. shares have been pulling back as the year winds down, but will this trend continue? Analysts at Barclays and Goldman Sachs think the pullback offers a potential buying opportunity for investors. Both remain Buy-rated on Apple and have addressed some year-end concerns in their reports this week.
Barclays reiterates Overweight rating on Apple
Although Apple shares remain up more than 33%, the stock has fallen 8% since late last month. As a result, Barclays analysts suggest investors might want to consider adding to their Apple positions going into 2015.
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In their report dated Dec. 17, 2014, Barclays analysts Ben Reitzes and Ryan Jones note that some markets like Russia will likely see impacts from geopolitical and macroeconomic volatility. However, their checks suggest Apple’s business is “performing well” in the U.S., Europe and China right now.
They believe current gross margin estimates will end up being conservative in the long term. They also believe though that this could be a “multi-year” part of the story. The Barclays team expects foreign currency headwinds to continue affecting Apple’s results, negatively impacting them by more than 200 basis points year over year per quarter through June. However, they think stronger than expected margins will offset these currency headwinds.
Why margin estimates may be too low
The Barclays analysts echoed comments made previously several times that iPhone mix should boost Apple’s margins and support them in the long term. In addition, they expect the Apple Watch to be accretive beginning in March “for years” going forward. They project an “iPhone-like” gross margin of about 50%.
They also believe Apple is planning to eventually release the rumored 12.9-inch iPad Pro, which should boost iPad gross margins in the long term. And finally, they think Apple Pay and other high-margin services will become a bigger part of Apple’s revenue mix “for years to come.”
For now, they note that Apple’s new product cycle brings higher average selling prices, which they say should at least partially offset the revenue headwinds from foreign exchange rates. The Barclays analysts also point out that Apple can sometimes raise its prices in foreign markets to hedge against volatility in exchange rates. While this can weaken demand, it can also help keep the company’s margins intact.
iPhone 6 demand expected to remain strong
The Barclays team expects demand for the iPhone 6 to remain strong through March because Chinese New Year is in February this year. They think there is a need to globally increase channel inventories of the iPhone 6 going into March.
The analysts say build trends suggest upside this month, with more than 70 million iPhone builds compared to consensus sales estimates of fewer than 65 million. Going into March, they say there are more than 45 million builds compared to the consensus estimate of 50 million in sales.
For the Apple Watch, the Barclays analysts estimate builds are about 10 million units per quarter, so they think investor sales estimates for the smartwatch could be too low.
Apple’s product map for 2015
In their report dated Dec. 16, 2014, Goldman Sachs analysts Bill Shope, Matthew Cabral an Alli Kaye looked more closely at Apple’s product roadmap. Like the analysts at Barclays, they expect iPhone 6 demand to continue for the next several months. Unlike the Barclays team though, they aren’t very optimistic about the Apple Watch.
They point out that the last couple of years, there was a “late-year demand / production correction,” but they see the risk of this happening again is low because of what looks to be a “robust” refresh cycle triggered by the iPhone 6. They also note that Samsung currently seems to be seeing a similar muted high-end product refresh like what happened in the last couple of years. This means Apple could be doing better than its top competitor with the current smartphone refresh cycle.
On the Apple Watch, the Goldman Sachs team doesn’t think it will be enough to move the needle much for Apple in terms of being a standalone device. They do think though that it will be a “critical platform enhancement.” However, they have one of the lowest Apple Watch estimates on Wall Street, as they project 9.5 million units during the 201 calendar year.
Other potential catalysts for Apple
The Barclays team also said they expect Apple management to consider another “large” capital return for shareholders in March or April. If the company decides to buy back more shares again, there could be further upside to Apple stock. The analysts note that Apple still has plenty of cash to return capital, including $18 billion in domestic cash, which amounts to $21 per share in net cash.
Shares of Apple Inc. rose more than 2% during regular trading hours today.
