Apple: The Great iPhone Unit Debate

Apple: The Great iPhone Unit Debate

Apple is set to release its next earnings report on Tuesday, and as always, iPhone unit numbers are in focus. Although analysts generally favor Apple, bears are predicting “only” 47 million units for the September quarter, and, in fact, Citi analysts actually removed the company from their Focus List. Also Bernstein said earlier this month that Apple’s at the top of its list of short ideas.

What to expect in Apple’s earnings report

Morgan Stanley analyst Katy Huberty, on the other hand, estimates 49 million units and possibly as many as 50 million on the high end, according to her AlphaWise Smartphone Tracker. Huberty, who has an Overweight rating and $162 per share price target on Apple and lists it as a “Best Idea,” expects the company’s results to be in line with estimates.

The analyst reports that her surveys suggest that demand for the iPhone is stronger than expected with the potential of a 7% unit growth in fiscal 2016, which began this month. She also notes that the September quarter includes only two days of iPhone 6S sales, so the quarter is not as relevant for Apple’s growth as the upcoming quarters are, she believes.

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She’s expecting $50.9 billion in revenue, a gross margin of 39.2% and $1.87 per share in earnings for the September quarter.

December guide may be higher than expected

Huberty is also expecting Apple’s guidance for the December quarter to be better than what bears are forecasting with numbers that are similar to those in past quarters or perhaps slightly under consensus estimates. She expects the numbers to imply “slight iPhone growth at the mid-point” and noted that guidance for revenue has been lower than consensus by 3% over the last ten quarters, although last year for the iPhone 6 cycle, it was only 1% lower.

These numbers suggest revenue of between $74 billion and $76 billion, the Morgan Stanley analyst estimates, which would be a 50% sequential increase. She expects Apple to signal a stable gross margin, which would also be consistent with other recent quarters, in a range of 38.5% to 39.5%. Consensus estimates suggest $77 billion in revenue, $3.21 per share in earnings, a 39.7% gross margin, and sales of about 76 million iPhones.

Data suggests iPhone growth

Huberty sees upside to Apple’s December quarter revenue because of iPhone demand, as she is estimating 79 million iPhones for the quarter, which represents a 6% year over year increase. She reports that her recent AlphaWise smartphone surveys in the U.S. and China indicate that Apple is gaining share in purchase intention.


She also thinks that restocking of channel inventory may boost shipments and help with the difficult year over year comparisons going forward. Further, she expects the average selling price for the iPhone to stabilize as her surveys indicate that consumers are opting for models with the bigger screen size and more capacity

Cowen bumps up Apple’s price target

Going into tomorrow’s earnings report, Cowen and Company analyst Timothy Arcuri moved his price target for Apple slightly higher from $130 to $135 per share and maintained his Market Perform rating on the stock. He said their recent surveys also indicate that the “bias to CQ4 guide is now to the upside.”

He believes Apple sold about 50 million iPhones in the September quarter and actually thinks unit sales in the December quarter could go as high as 78 million to 80 million—putting him at the high end of Wall Street estimates, which now average at around 75 million to 75 million units.

The Cowen analyst expects revenue at around $51.5 billion and earnings of $1.87 per share for the September quarter with a possible slight bias to the upside. He specifically named the launch of iPhone sales in China this year as being a driver because last year Apple did not include China in the initial launch for the iPhone 6 line. However, he also noted that the iPhone launch was about a week later, which means there was a shorter time for new unit sales this year compared to last year.

For the December quarter, Arcuri upped his estimates from $77 billion to $80.1 billion for revenue and earnings from $3.17 to $3.34 per share.

The bears on Apple’s earnings

Huberty notes that sentiment on Apple is pretty low right now, and analysts at Pacific Crest are in the bear camp. They have an Equal Weight rating on Apple and actually think consensus estimates for the December quarter are too high. However, their September quarter estimates are ahead of consensus and higher than Huberty’s.

For the September quarter, analysts Andy Hargreaves and Evan Wingren are estimating revenue of $51.3 billion, a gross margin of 39.7%, and earnings of $1.92 per share. They project sales of 47.8 million iPhone units. They’re significantly behind estimates for Apple’s September quarter. They expect management to guide for revenue of between $67 billion and $70 billion and a gross margin of 39% to 40%.

For now, Hargreaves and Wingren believe investors are already pricing in worries about iPhone unit demand, so they see the biggest risk to Apple shares as being the possibility of margin pressure. Interestingly, last week Citi analysts mentioned that they think the company will become more of a gross margin story than an iPhone unit story.

Graphs in this article are courtesy Morgan Stanley.

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