When it comes to Apple stock, Wall Street’s tendency has been toward bullishness for years, although not with short times of questionable sentiment. Now, however, the iPhone maker’s stock seems to have become rather polarizing, joining the ranks of Tesla and a handful of others. Bulls are continuing the usual narrative, which is that Apple can do no wrong, but a growing number of analysts is starting to question whether the buy-side is expecting too much.
In a note to investors this week, Deutsche Bank analyst Sherri Scribner warned that Apple stock may be at or near a top because investor expectations for this year’s iPhone lineup may be “more optimistic than realistic.” She warned that she’s expecting Apple’s iPhone unit numbers to come in “well below market expectations” for both fiscal 2018 and 2019.
She noted that consensus estimates have been steadily climbing higher all this year, so she feels that upside is already priced in. Further, she said that Apple stock has historically climbed into the new iPhone launch and then seen little upside after the launch. She explained that the stock climbed 37% this year, which beat the iPhone 6 cycle’s pre-launch performance by 9 percentage points. Sales estimates have tacked another $19 billion onto where they stood in late January, which is almost double the estimate revision going into the iPhone 6 cycle.
In order for Apple to beat consensus by a magnitude similar to what it beat estimates for the iPhone 6 cycle, it will have to ship another 45 million more iPhones, which she sees as “highly unlikely.” Scribner also warned that the consensus expects yet another record year in fiscal 2019, on top of the 245 million iPhones it expects for fiscal 2018. She expects fiscal 2019 to be more similar to the iPhone 6s cycle when units numbers declined, and Apple stock along with them.
In his report earlier this week, Bank of America Merrill Lynch analyst Wamsi Mohan said that it’s just too early to make a call of any kind on this year’s iPhone cycle. The iPhone 8 and 8 Plus only just started landing in buyers’ hands, and the initial concern was that demand for both handsets seemed muted so far. The iPhone X won’t become available until early November.
He praised Apple’s widened phone portfolio, saying that it now has “unprecedented breadth” because of how many price points it addresses. He also offered evidence that suggests buyers may not hesitate as much as some think they might at the $1,000 and $1,150 iPhone X. He explained that analysis of smartphone sales according to “price band” indicates that Apple has previously be able to “get consumers to migrate from lower priced to higher priced phones.”
While Scriber is focused on consensus and the fact that investors have pushed Apple stock so high, Mohan feels that investors “seem to be worried about the cycle.” His own unit estimate of 230 million is much lower than consensus, at 245 million. However, he places more emphasis on growth in gross profit dollars rather than units, and the higher average selling price should result in strong growth in gross profits. He added that Apple stock has been tracking gross profit dollars.
In the meantime, before the arrival of any earnings reports covering months of availability for the iPhone X or even the iPhone 8 and 8 Plus, other things have been dragging Apple stock down. Bernstein analyst Toni Sacconaghi, Jr. offered up a few of them, and they go beyond just the iPhone. Of course, he mentioned that investors have been concerned about “unusually strong iPhone 8 pre-order availability,” which some are taking to indicate that consumers might buy the iPhone 7 or 7 Plus instead of the iPhone 8 or 8 Plus. The concern is essentially the lack of differentiation from last year’s models, paired with a $130 to $150 higher price tag.
However, he also noted that early reviews of the Apple Watch Series 3 have been poor. Apple itself even admitted that there were problems with the LTE on the smartwatch, could damage sales, although some consumers just like the idea of an Apple Watch they can use separately from their iPhone to make calls. Apple claims that the LTE problems are just a bug that will be fixed in a future software update. However, the fact that the earliest reviews of the Series 3 was “neutral to negative,” as he describes them, is certainly a concern. Nonetheless, he seems to think that LTE will be the one thing that will turn the Apple Watch from a novelty accessory into something with a “significantly more compelling value proposition.”
Sacconaghi also feels that investors might be concerned about Google’s acquisition of HTC, which they see as possibly putting competitive pressure on Apple in the future, but he doesn’t seem very concerned about it.
Apple stock ticked slightly higher on Friday, rising by as much as 0.32% to $153.77 in afternoon trading
