Apple Stock Hangs On Upcoming iPhone 7 Launch

Apple Stock Hangs On Upcoming iPhone 7 Launch
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Apple fans are looking forward to the unveiling and launch of the iPhone 7, probably next month, and suppliers appear to be preparing for a strong cycle this year. Meanwhile the debate about whether there will be a return to iPhone unit growth this year rages on, but most analysts see no reason to worry and possibly upside coming for Apple stock this year.

iPhone 7 ramp stronger than usual

Drexel Hamilton analyst Brian White released the latest results from his Apple Monitor in a report dated August 9. He said almost all of the Taiwan-based companies in his Apple Monitor have reported their July sales, and the results were better than the historical average. He believes the iPhone 7 ramp started having a positive impact on sales last month.

Preliminary July sales for the monitor increased by about 14% to 15% month over month, beating the 11-year average of a 9% increase month over month. However, seasonality associated with the iPhone sales has increased in the past five years, boosting July sales in the Apple Monitor 7%. In July 2015, sales in the monitor grew 8%, which still puts this year ahead of last year.

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Misunderstanding about iPhone declines impacting Apple stock

White believes that Apple’s June quarter performance triggered a shift in sentiment from the “‘gloom and doom’ mentality” toward a more positive viewpoint. He drew some comparisons with the summer of 2013 and said he expects this summer to represent a bottom for Apple stock.

The analyst adds that he believes sentiment on the stock shifted heavily toward the negative end of the spectrum because of a misunderstanding for the reasons for the iPhone unit declines. As a result, he believes concerns about this issue are overblown. He notes that macro factors and lengthening smartphone upgrade cycles are playing a role in the declines, but he thinks the bigger factor is the difficult year over year comparison the iPhone 6s lineup faced against the massive iPhone 6 upgrade cycle, which resulted in a 37% increase in units in fiscal 2015.

Upside bias for Apple stock

RBC Capital Markets analyst Amit Daryanani also sees the potential for upside bias to Apple stock soon. He noted that the iPhone 7 will likely at least moderate unit declines, if not drive a return to unit growth. He also believes Apple’s gross margins will either remain stable or improve after the September quarter tanks to easing currency headwinds and an improving product mix.

He also believes that the company’s pledge to return most of its more than $60 billion in free cash flow to shareholders every year during this time of low interest rates might pique the interest of value investors.

Apple pressuring iPhone suppliers?

Daryanani’s August 9 research note also focused on Apple’s suppliers, but he took a different angle than White did, as White looks at sales in the company’s supply month on a month by month basis every month. Daryanani suggests that Apple might have been pressing most of its suppliers for discounts in order to deal with the currency headwinds going into the iPhone 7 ramp.

As a result, he said the company might end up surprising to the upside on gross margins compared to guidance, which was for flat margins in the September quarter. Additionally, some of the company’s suppliers might end up missing estimates for earnings per share.

He explained that 10 of 11 Apple suppliers have warned that their gross margins may decline in the second half of the year. In fact, he said the downward revision trend in gross margin estimates has been consistent, although he noted that Apple suppliers have not specifically blamed pricing pressure for their lower gross margins.

Shares of Apple stock edged lower by as much as 0.08% to $108.28 during regular trading hours on Tuesday.

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