Apple has scheduled its next quarterly earnings report for April 27, and analysts are quite bullish on the company going into that report. Most are expecting results that are toward the high end of management’s guidance, with some analysts expecting a solid beat of consensus estimates.
iPhone 6 models still selling out
In a report dated April 1, Citi analysts Jim Suva and Asiya Merchant reiterated their Buy rating and $145 per share price target on Apple. They think consensus estimates are missing a number of things based on their checks of the company’s supply chain and continued strong demand for the iPhone 6 and iPhone 6 Plus. They also say demand for the models with higher memory densities will raise the average selling price of the smartphone.
In fact, the Citi team reports that even though the iPhone 6 and iPhone 6 Plus were launched six months ago, some retailers are still selling out of the 128 gigabyte models daily. Also some mobile carriers are seeing shipping times that are even longer than they were when the phones were launched.
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Apple will beat sales estimates by $1B
One of the issues Apple Inc. (NASDAQ:AAPL) and all other international U.S.-based companies are dealing with is the strengthening of the U.S. dollar. Currency exchange rates have been pounding companies’ bottom lines, but even after adjusting for those exchange rates and weak iPad sales, they’re still expecting Apple to beat consensus estimates.
They’re estimating a beat of at least $1 billion on revenue and at least 5% on iPhone unit shipments. In earnings per share, they’re expecting to see at least a 2% beat compared to the consensus estimate. That includes a negative year over year impact of 6% from currency exchange rates.
Any reason to worry about Apple?
The analysts do point out that there are some reasons to worry about Apple. For example, Apple Pay is now only in the U.S. In addition, Apple Inc. (NASDAQ:AAPL) still faces currency headwinds, and iPad sales continue to fall while sales of the bigger iPhone 6 Plus remain strong.
They say it appears as if the iPhone 6 Plus may be cannibalizing sales of the iPad Mini to some extent. Additionally, Apple is lacking a consumer grade iPad update.
Why Apple stock will move higher
So why are Citi analysts convinced that Apple stock is going up? They provided six reasons, the first of which they list as “device acceleration.” They point out that Apple is benefiting from mobile carriers’ decision to allow customers to upgrade their devices before their contracts expire.
The reason for this is to keep them from changing carriers by giving existing customers the same treatment as new customers by offering them attractive promotions. The analysts don’t think investors fully understand this change in consumer behavior yet, but when they do, they expect Apple stock to rise.
Their second reason is because they think Apple Inc. (NASDAQ:AAPL) shares offer an “attractive valuation” despite their more than 40-times appreciation last year. They think consensus estimates should be raised and that Apple deserves a higher multiple. The stock is currently trading at around 14 times forward earnings or 11 times excluding cash. That’s compared to the S&P 500’s 17 times forward earnings.
Apple’s gross margins also offer upside
Thirdly, they expect upside in gross margins, another point made by analysts at other firms recently. The Citi team, however, say they expect margins to step up permanently. The main reason for this view is because more and more people are using apps. A second reason is because camera resolutions are becoming better and better, which is probably why consumers are opting for phones with more storage compared to their less expensive 16-gigabyte counterparts.
The Citi team notes that Apple Inc. (NASDAQ:AAPL) adds $100 to the price of an iPhone for each step up in memory, but the memory itself only costs an extra $20, meaning there’s an 80% incremental gross margin on higher memory configurations.
Apple Pay and enterprise
Fourth, they think Apple Pay and Passbook both offer “tremendous upside potential,” and they provide 15 possible uses of the two services going forward. Of course there is the mobile wallet and payment processing, but there are also applications in iAds, iBeacons, hotel and vehicle keyless entry and others.
Fifth, they note that Apple Inc. (NASDAQ:AAPL) has some great potential in enterprise. So far, the company has only been focused on consumers, but they expect the company to become more serious about going after enterprise customers. In particular, they note that the partnership between Apple and IBM should drive enterprise sales and increase stickiness for enterprise users.
And finally, they like the potential of the Apple Watch, which hits store shelves later this month. They are less sure on the smartwatch as a catalyst for Apple stock, however, as the one-day battery life and lack of built-in GPS are not impressive. They expect the company to eventually take care of these issues, but not until the next generation of the Apple Watch.