Apple stock took a beating earlier this year as investors worried about weakness in the iPhone 6s cycle, and that weakness continues. The stock remains volatile, declining by as much as 0.7% to $102.28 per share after rallying on Friday. However, analysts continue to emphasize that this year’s iPhone 7 should fuel a return to growth after what’s been a troubling iPhone 6s cycle, and at least one firm thinks the iPhone SE, which is expected this month, might replace not only the iPhone 5s but also the iPhone 6.
More cautious on Apple stock
Analysts from multiple firms have warned that iPhone demand will likely remain weak ahead of the iPhone 7 launch this fall, so it should come as no surprise that demand remains soft. However, today’s decline in the price of Apple stock comes on the heels of a price target decrease by Pacific Crest Securities analysts Andy Hargreaves and Evan Wingren. They trimmed their target from $132 to $127 per share but remain Overweight-rated on Apple stock. Their bull case moves to $150, while their bear case moves to $89.
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They have taken a more cautious stance on Apple because demand remains soft, although they add that it also appears to have remained stable over the last two months, based on their supply and demand checks. Their checks suggest that Apple’s March quarter results could come in line with the low end of guidance, which is why they have become more cautious.
They’ve cut their March quarter iPhone unit estimate from 49 million to 47.5 million, which pulls their sales estimate down from $51.3 billion to $50 billion. Their adjusted earnings estimate now stands at $8.73 per share, down from $8.89.
iPhone 7 to spur strong growth for Apple
The Pacific Crest team also looked at replacement dynamics and say that based on those projections, the iPhone 7 should bring a return to strong growth. They expect “normal replacement dynamics” to push unit growth up by the mid-teams because they don’t see any signs that iPhone users are fleeing the iOS platform in greater numbers than previously.
On the other hand, they expect Apple will only add 27 million net new users in the fiscal 2017 iPhone 7 cycle, which would mean about a 12% growth rate in global smartphone users. This would also be lower than the typical 15% share they expect the company to add in the iPhone 6s cycle, which they note most investors believe is a “dud.”
High-end smartphones to see slowing growth
They warn also that laying aside replacement cycles, the high end of the smartphone market will likely see slowing growth, partially because of “the strong likelihood that incremental hardware innovation will have diminishing consumer value.” They believe this shift will be permanent and that software and Internet services drive most of the value in smartphones, which will likely weigh on replacement rates and, eventually, pricing.
One thing Apple has going for it is that its brand is strong, so the Pacific Crest team thinks iPhone buyers are paying mostly for the OS, brand and ecosystem, and they don’t expect pricing for them to compress. Replacement cycles could extend, which would weigh on unit sales. However, they think growth in the size of the world’s middle class will be able to offset this risk.
iPhone SE may replace both iPhone 5s and iPhone 6
Apple is expected to unveil a new 4-inch iPhone called the iPhone SE on March 21, and Hargreaves and Wingren believe the goal here is maintaining the differentiation in the iPhone lineup based on the size of the display. They see this as a wise move because it could prevent “trade-down activity,” which would risk gross margins.
Based on their supply checks, they think the iPhone SE will see similar production rates as those of the iPhone 5s and past lower end iPhones, which they say means it’s essentially a replacement for the iPhone 5s “rather than a device that is intended to spark incremental unit volume through elasticity.” This runs counter to other reports that Apple will continue producing the iPhone 5s even after the iPhone SE is launched but in line with what other analysts are expecting.
They add that the timing of the launch suggests that the model will continue being sold through the iPhone 7 cycle. Further, they think the iPhone 6 might be discontinued when the iPhone 7 is released—something few (if any) others have speculated.