Apple Inc. (NASDAQ:AAPL) continues to struggle as bearish sentiment gained an even stronger foothold on Wednesday. Another analyst downgraded Apple stock in the early morning hours, expressing concerns about the company’s average selling prices, which he expects to plateau just as they have in the rest of the industry.
Meanwhile, U.S. officials started to probe the company for its slowing of older iPhone models, and the next Apple earnings release moved closer and closer. The investigation and analyst downgrade threatened to trigger yet another Apple stock correction as shares initially fell for the third morning in a row before bouncing.
Concern about Apple’s average selling prices
BMO Capital Markets analyst Tim Long downgraded Apple stock to Market Perform and cut his price target from $199 all the way down to $162. He echoed the concerns about iPhone X demand expressed by other analysts repeatedly, which have triggered the Apple stock correction.
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Long warned that a weaker iPhone mix in the December quarter will likely push estimates for Apple’s March quarter and beyond lower, although he’s more concerned about the downward shift in average selling prices. He explained that the company has “done a good job” at pressing its average selling prices higher even though others in the industry have been “flat-lining.” He estimates that approximately 30% of the iPhones sold this year will be priced higher than $900, but he expects this price to stop rising from now on. He noted that around the globe, just 12% of the smartphones sold are selling for more than $600.
He noted that the Street was generally excited that Apple had returned to growth in China in 2017, but he expects the December quarter to be roughly flat as units fall 9% year over year.
Is this Apple stock correction just a repeat of 2016?
He also warned that if September does not bring a “compelling product” release, the next upgrade cycle could be weak again. He also said that the recent Apple stock correction reminds him of what was observed in early 2016.
However, later that same year, investors began to anticipate the release of the first iPhone model with an OLED display and a special 10th anniversary edition model. That drove the company’s stock much higher, but unfortunately, no such special product is anticipated this year, which could mean that the Apple stock correction could have more staying power.
He expects Apple stock to remain range-bound as the company’s numbers shift lower. Thus, he will remain on the sidelines until “better visibility into the next iPhone refresh in the fall.”
When iPhones disappoint, analysts look to services
As BMO downgraded Apple stock, Bank of America Merrill Lynch analyst Wamsi Mohan followed a tactic we’re seeing for it more and more often as it becomes clear that the iPhone story may be turning boring. He focused on services again and said that the Street has become “too pessimistic” on Apple stock. He maintains his Buy rating and ultra-bullish $220 price objective on it.
Based on his analysis of Apple stock, he feels it’s “already discounting a declining hardware business and a worse than run rate trajectory for services.” He expects App Store revenues and iCloud to drive much of the growth in the services segment, and because the segment tends to have stronger gross margins, he sees upside there.
Going into the Apple earnings release for FQ1 on Thursday afternoon, he views the setup for Apple stock as “favorable.”
Apple stock was still challenged in early trades on Wednesday, remaining range-bound between $166.76 and $168.44.