Apple Inc. (AAPL) Earnings Preview: iPhone 6 Cannibalizing iPhone 6s

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Apple is scheduled to release the earnings results from its first fiscal quarter in less than a week, and analysts are churning out preview reports fast and furiously. Overall sentiment on the iPhone maker’s stock is bearish right now, with shares tumbling below $100 and remaining there for a sustained period of time.

At least one firm’s analysts believe earnings growth may not return toApple Inc. (AAPL) until next year, while another firm’s survey found that a surprising percentage of iPhone buyers are opting for older models rather than the brand new ones.

iPhone 7 won’t help Apple bounce back: Raymond James

In a report dated Jan. 19, Raymond James analyst Tavis McCourt said he sees several problems facing Apple over the next couple of years. Most analysts are focusing on the iPhone 7, which is expected to be released this fall, as a source of future growth for the company. However, he’s not buying it. Bulls are banking on this year’s iPhone lineup performing much better than the iPhone 6s lineup is doing, but McCourt doesn’t expect a big “bounce-back” from the smartphone.

He may be one of the biggest Apple bears right now as he even said that he doesn’t expect the company’s earnings to see positive year over year growth until March 2017. As a result, he expects the iPhone maker’s stock to remain range-bound for “a few more quarters” even though it looks cheap right now.

He added that the last time the company’s earnings per share declined year over year, its share price troughed a little under six times TTM P/E ex cash, which would be about $75 now, although he notes that the S&P 500’s multiple was a lot lower then as well. The good news is that unless there’s a “major economic and market disruption,” he doesn’t think the stock will fall to this level. Currently Apple stock trades at about 11.5 times McCourt’s calendar year 2016 earnings per share estimate and 5.3 times EV/ EBITDA.

And it doesn’t help that Apple is facing all the same macro headwinds other tech giants are facing. The U.S. dollar is still strengthening. If the company does release the rumored iPhone 6c—as it’s being called—early this year, he sees the potential for “modest upside” to his iPhone estimates if it is successful, however.

iPhone 6s lineup not differentiated enough

UBS analysts noted another interesting and troubling trend in the recent concerning data points from Apple’s iPhone supply chain. In a report dated Jan. 20, Steven Milunovich cited a recent CIRP survey, which found a mix shift toward older iPhone 6 models rather than the newer iPhone 6s models. The survey found that only 67% of iPhone sales during December were one of the new iPhone 6s models, which is a significant decline from last year’s 75%.

The data seems to indicate that Apple failed to differentiate the iPhone 6s lineup from the previous iPhone 6 lineup because consumers are instead choosing to pay $100 less for the older models.



As a result, the analyst suggests that the average selling price for the iPhone in the U.S. actually fell 1% year over year, bringing it to $700. Further he estimates that the currency headwind compared to the previous year for iPhone average selling prices will be about 4%, which is a little worse than it was in the September quarter because of the 4% decline in China’s renminbi. Just a 1% change in the Chinese currency amounts to approximately an earnings change of 5 cents per share, states Milunovich.

Like McCourt, he also expects there to be a new 4-inch iPhone model this year, adding that it could help boost sales because the sales mix seems to suggest that some users actually prefer a 4-inch screen even though the iPhone 6 and 6s have been hugely popular. Milunovich noted that the iPhone 5s is now the low-end model since the iPhone 5c was retired, and it has has held a share in the low double digits for the last five quarters.


Further, he said the iPhone Plus models (6 and 6s) amounted to 26% of the total iPhone mix during December, a decline from 30% in December 2014.

Apple still faces iPhone troubles

This trend was noted on top of the already known data points indicating that iPhone shipments are worse than Wall Street was expecting. Developed countries are seeing lower upgrade rates. The UBS analyst adds that the December quarter’s results probably won’t help Apple stock but that the good news is that upgrade timing instead of a decline in market share or big pressure on margins, as was the case in 2012. He seems to agree with McCourt that this time around with difficult iPhone sales numbers, Apple shouldn’t lose as much value as it did the last time.

Milunovich thinks the company’s franchise remains solid, and as a result, he says he’s take his “short-term lumps” and continue to rate Apple as a Buy with a $130 price target. The stock declined by as much as 2.52% to $94.27 per share.

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