Apple: Will That iPhone 8 “Supercycle” Ever Materialize?

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Analysts continue to bank on the iPhone 8 as Apple’s saving grace, particularly amid new reports about production and estimate cuts for the iPhone 7 lineup. The iPhone 7 Plus has seemingly been selling better than its smaller sibling, but even it may not be immune to consumers’ high expectations for the iPhone 8.

Apple said to cut orders for the iPhone 7

In a research note dated Jan. 5, Longbow analyst Shawn Harrison said they observed cuts to iPhone 7 production during the fourth quarter. On the plus side, however, he said they didn’t pick up any cuts to iPhone 7 Plus production. His contacts continue to expect the usual level of production cuts in the early part of the first quarter, which is usually around 10% to 20%.

His checks about a month ago pointed to a cut of 5% to 10% in the number of iPhone 7 handsets being produced during the fourth quarter, and he said the size of this cut was no surprise. However, he said it came earlier than he had been expected, and his contacts attributed the early arrival to weak demand in China. Certainly Apple’s last earnings report demonstrated that iPhone demand was weak there, so this could mean that China was weak during the December quarter as well.

Harrison’s contacts estimate that at least 40% of iPhone shipments during the December quarter were the iPhone 7 Plus, and he called this percentage “dynamic,” saying that it confirms Apple’s improperly balanced expectations. He sees the latest news of order cuts as simply being typical production changes rather than “abnormal” cuts. As such, he sees a buying opportunity for Apple stock going into what he expects to be a “much more robust next-gen iPhone cycle.”

Harrison has a Buy rating and $140 price target on Apple stock.

Cutting estimates for iPhone 7 Plus

While Longbow highlighted production cuts for the iPhone 7 and continued strength for the 7 Plus, Nomura analyst Jeffrey Kvaal said in his Jan. 4 research note that he has trimmed his estimates for the 7 Plus. He also feels that the iPhone 7 lineup reached its current state more quickly than expected, although in his case, he’s speaking to the amount of time it took Apple to reach equilibrium in the supply/ demand balance for the iPhone 7 Plus.

Shipment times for the phone fell from 22 days to 1 day by the end of last month, and Kvaal said that while it seems that production constraints on the dual-lens camera modules seem to have eased, he believes demand has eased as well. As a result, he cut his estimates for the March and June quarters again.

Like Harrison, Kvaal also talked up the iPhone 8, saying that the “supercycle” seems to be “well underappreciated.” He noted that consensus estimates suggest that Apple will sell 80 million iPhones in the December 2017 quarter, which is roughly flat with the December 2016 quarter and just a little higher than the iPhone 6 cycle. However, he added that the iPhone 8 should be launching into a subscriber base that’s 45% to 50% bigger than the base the iPhone 6 launched into, so he’s estimating 86 million iPhones in the December 2017 quarter.

More than just iPhones at Apple

Guggenheim analysts initiated coverage of Apple stock on Wednesday with a Buy rating and $140 price target. They said that while growth of the iPhone is decelerating, investors receive “optionality for free” with Apple stock because of how quickly the company innovates and how low its valuation is. Interestingly, while talking up the speed of Apple’s innovation, they said the company might need a new product before it will see any incremental growth. They suggested an Apple car, although talk of one has died down since the rumor that the company had greatly scaled back its car project.

UBS analyst Steven Milunovich called for more patience in his Jan. 4 research note, as he sees Apple’s real innovation as its iOS platform. He also noted recently that the iPhone maker is in need of new product categories, and he feels that the Apple Watch and AirPods could just be transitional offerings.

Shares of Apple stock edged upward by as much as 0.61% to $116.72 during regular trading hours on Thursday.

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