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Apple Stock PT Cut, Goldman Expects Shift To iPhone SE From iPhone 7

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Apple stock pulled back in early trading after Goldman Sachs analysts said they trimmed their estimates and price target due to lower smartphone growth. They also expect the iPhone’s average selling price to decline on the back of a mix shift toward the less expensive iPhone SE and away from the iPhone 7, which is expected to be released in the fall.

Slowing smartphone growth weighs on Apple stock

In a report dated June 1, analyst Simona Jankowski and team said they trimmed their estimates for Apple based on their reduced growth expectations for the smartphone industry. They’re now projecting global unit growth of 5% for this year and 4% for next year, compared to their previous estimates of 6% and 7%, respectively. Further, they provided more color on their iPhone estimates by analyzing models and growth expectations by region and by overlaying their inventory estimates.

They cut their unit shipment estimates for the iPhone by 5% for fiscal 2017 and 11% for fiscal 2018. They are now estimating 211 million iPhone units for fiscal 2016, 231 million for fiscal 2017, and 223 million for fiscal 2018, indicating that another year of unit declines is expected in the near future. Their numbers compare to the consensus estimates at 210 million, 222 million, and 234 million for the current and next two years respectively.

Based on their revised estimates, their price target for Apple stock falls from $136 to $124 per share, although they maintain their Buy rating.

iPhone average selling price to fall

The Goldman team also noted that emerging markets are expected to grow much faster than developed markets, and as a result, the less expensive iPhone SE will likely become a bigger piece of the pie against the upcoming iPhone 7. Their new average selling price estimates for fiscal 2017 and 2018 are 2% to 3% lower than their previous estimates. This results in an 8% reduction in their 2017 earnings per share estimates and 11% decline in their 2018 earnings estimates.

Jankowski and team noted that the iPhone’s market share has historically fluctuated in two-year cycles, which is why they are expecting the iPhone 7 to do well this year and then fiscal 2018 to bring another decline with the iPhone 7s.

Source: Goldman Sachs
Source: Goldman Sachs

They appear to be expecting the two-year fluctuations to continue, although Nikkei reported earlier this week that Apple will be shifting to a three-year major upgrade cycle rather than the current two-year cycle. There have been multiple reports that the iPhone 7 won’t be much of an upgrade from the iPhone 6s, so Nikkei’s report appears to support that rumor.

iPhone sales by geography

Breaking down their expectations for iPhone sale by region, the Goldman team said they expect Apple’s market share to modestly decline in North America and other developed markets.

Source: Goldman Sachs
Source: Goldman Sachs

The story isn’t any better in China either, which is seen as the big prize for multinationals because of its massive population. Apple reported a huge decline in sales in Greater China in the March quarter, and Jankowski and team expect this trend to continue as shipments of lower-end smartphones increase. They describe Apple’s market share decline in Greater China as “declining significantly.

However, other emerging markets should share up better for the iPhone maker as the Goldman team expects them to partially offset the declines in Greater China.

Source: Goldman Sachs

They expect a 3% decline in average selling price for the iPhone in this year and next year and a 1% decline in fiscal 2018 as shipments to emerging markets increase. They expect emerging markets to be shifted toward the less expensive iPhone SE and its successors, with emerging markets counting for 45% of iPhone shipments in calendar 2016.

Source: Goldman Sachs
Source: Goldman Sachs

Shares of Apple stock declined by as much as 1.16% to $97.32 in morning trades on Thursday, keeping in line with analysts from at least two firms who said the shares will remain range-bound for now.

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