Apple Inc. Earnings Spark Mixed Analyst Commentary

Apple Inc. Earnings Spark Mixed Analyst Commentary

Apple stock climbed today following last night’s earnings report as investors reacted to the earnings beat. Shares rose by as much as 1.94% to $116.77 per share, but not all analysts were thrilled with last night’s report. Interestingly, some raised their price targets, while others actually cut theirs. Clearly Wall Street doesn’t know what to make of Apple right now.

We’ll look at the analysts who are more positive on Apple’s earnings report in this article and those who are more negative in a separate article. Notably, Morgan Stanley analyst Katy Huberty cut her price target for Apple Inc. (NASDAQ:AAPL) stock.

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Apple by the numbers

Apple posted adjusted earnings of $1.96 per share and revenue of $51.5 billion, beating the consensus estimates on both the top and bottom lines. The company shipped 48.05 million iPhones during the quarter, which was toward the low end of the range of analyst estimates.

Revenue from Greater China rose 99% year over year to $12.5 billion, and iPhone volume there climbed 120%. Clearly the company hasn’t felt any impact from the soft consumer market and macroeconomic issues going on there.

Apple management guided for revenue of between $75.5 billion and $77.5 billion for the December quarter, which was on the low end. They expect gross margins to be between 39% and 40%.

iPhone demand remained strong

Apple reported that demand for the iPhone was greater than supply during the September quarter, which pushed it under its target of having channel inventory for five to seven weeks. The average selling price for the iPhone rose 11.2% to $670 despite headwinds from the strong U.S. dollar. The company also reported that 30% of iPhone volume during the quarter came from people switching from an Android device, which Baird analysts William Power and Steven Beckert note is a new record for switch rate.

Further, Apple said a little more than 30% of iPhone users had an iPhone 6 or iPhone 6 Plus during the September quarter, which the Baird team said suggests that there are continuing opportunities for the company in smartphones.

They estimate that Apple sold about 3 million Apple Watches with an average selling price of $450, although once again the company did not break sales of the device out of the Other category, lumping it in with the Apple TV set-top box and other devices. The Baird team maintained their Outperform rating and $155 per share price target on Apple.

Barclays ups Apple’s price target

Barclays analyst Mark Moskowitz actually raised his price target for Apple from $150 to $155 per share and reiterated his Overweight rating on the stock. He sees this as a good time to either build or add to Apple positions, writing, “The model sits on the right side of what we call the Triple Divide.” He noted that year over year comparisons for iPhone sales are difficult and believes that the comparisons could “make for an air pocket or two” in the first half of fiscal 2016.

However, he believes that debate on growth of the iPhone might end up being moot, even though following the earnings call, talk has been about whether Apple can keep growing units. He thinks these concerns are not warranted and that the risk of growth problems for Apple’s smartphone business is “diminishing,” at least for now.

He likes the stock because of “sturdy” average selling prices; the pickup in people switching to the iPhone; the possibility for replacement cycles to shorten due to the company’s recently announced upgrade program; and possibly a “more favorable mix” as Apple’s services increase the stickiness of its platform.

In terms of the Apple Watch, Moskowitz notes that adoption isn’t as strong as he would like but adds that it’s still early. He thinks the seemingly low numbers for the device speak more to the early stage wearable adoption is in rather than the popularity of the Apple Watch. He estimates that Apple Watch sales amounted to $1.4 billion, a 24% sequential increase that missed his expectation of $2.1 billion. He added that right now, the device isn’t a “big part of the stock or Apple story.”

Pacific Crest upgrades Apple to Overweight

Analysts Andy Hargreaves and Evan Wingren of Pacific Crest Securities actually upgraded Apple to Overweight and set a target price of $142 per share following last night’s earnings report. They said expectations for the iPhone 6S cycle have come down and believe that March will bring “the low point for growth.” They note that the company’s price to earnings multiple has compressed by about 12% since early July and by more than 20% so far year to date. They believe this compression mostly prices in the possibility for growth to stagnate during this year’s iPhone cycle

They like that Apple is growing its market share and “retains extraordinary pricing power,” which they believe will support growth in the company’s shares as fiscal 2016 goes on. Further, the Pacific Crest team upped their iPhone unit estimate for the December quarter from 66.9 million to 75.9 million. That raises their earnings per share estimate for fiscal 2016 from $9.25 to $9.50 per share. For fiscal 2017, they expect Apple to grow its smartphone units by 9% with the iPhone 7 cycle. They have an estimate of $10.30 per share for fiscal 2017.

Apple’s “Super Cycle” intact: Drexel Hamilton

Analyst Brian White, who has one of the highest price targets for Apple at $200 per share, reiterated his Buy rating on the stock and said Apple’s “super cycle” is intact despite the difficult comparisons with last year. He noted that “Apple fever” continues in China as performance there continues to be strong.

White believes Apple is one of the technology sector’s most undervalued stocks and that the company is “positioned better than ever to capitalize on the ramp of the mobile Internet.” He estimates that Apple sold about 4 million to 4.5 million Apple Watches during the September quarter—well ahead of the 3 million Moskowitz estimates. He also thinks unit sales of the device actually outperformed Apple’s expectations. White also expects the smartwatch to be “a major hit” during the holiday shopping season and that the company is “innovating like never before.”

Stifel also positive on Apple’s earnings

Stifel analyst Aaron Rakers and his team also see last night’s earnings report as positive, and they raised some of their estimates. For fiscal 2016, they maintained their revenue estimate of $248.9 billion but upped their earnings estimate from $9.73 to $9.85 per share. Their 2017 revenue estimate moves from $263.1 billion to $266.6 billion, while their earnings estimate for the year gets bumped up from $10.44 to $10.75 per share.

They do question whether the iPhone average selling price will rise in the December quarter but note that Apple management expects to see growth in both unit and revenue for the smartphone.

Still “fuel” in Apple’s engine

FBR & Co. analyst Daniel Ives maintained his Outperform rating and $175 per share price target on Apple and said he thinks last night’s report “proves yet again how much fuel is left in the iPhone engine.” He maintained his revenue estimate of $77 billion but upped his earnings estimate from $3.17 to $3.24 per share because of Apple’s “good” guidance for gross margin and continuing share buyback program. He cut his revenue estimate for fiscal 2016 from $249 billion to $245.8 billion but raised his earnings estimate for the year from $9.67 to $9.80 per share.

The FBR analyst thinks Apple’s story could shift more toward the positive now and noted that sales in China remained “white hot.”

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