Low Expectations Could Work In Apple’s Favor

Low Expectations Could Work In Apple’s Favor
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Apple is not expected to perform well, and it could work in its favor. As expectations are low, this makes it easy for the company to surprise Wall Street with its performance once it posts quarterly results later this month, said an industry watcher on Tuesday.

Low expectations in favor of Apple

“The bar has been lowered for this quarter, and we think that’s a great setup for Apple to beat expectations. If they don’t, the expectations are already low, so we see limited downside,” Channing Smith, managing director of equity strategies at Capital Advisors, said. Apple could possibly get another catalyst in the form of improved margins.

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Some of the analysts covering Apple have lowered their sales projections for the iPhone. This is very unlike the lofty expectations these devices are used to, Smith said on CNBC‘s Power Lunch.

Citigroup analyst Jim Suva recently slashed his iPhone sales estimate and expects other sell-side analysts to do the same. Suva now expects Apple to sell 47 million iPhones in the fiscal fourth quarter, from his earlier 47 million estimate. He shifted the cut in units to the fiscal first quarter.

Explaining the cut, Suva said that even though iPhone 6S and 6S Plus sales have beaten expectations with 13 million units, the company will count only the first Friday and Saturday of sales in the fourth quarter results. Suva reiterated his Buy rating on the stock with a price target of $145. He sees potential for upside to gross margin estimates and believes it could eventually become a focus for investors.

Investors underestimating iPhone upgrades

In the last three months, Apple shares have declined by more than 11%. Investors are concerned that the company could experience a slowdown in China, which is an important growth market.

Dan Ives, managing director and senior analyst at FBR Capital Markets, believes that the effect of iPhone upgrades has not been taken into consideration by many investors. Less than 30% of the iPhone users have upgraded to the iPhone 6, and next year the number could rise to 65%, the analyst said.

“That’s really the fuel in the tank for Apple here and ultimately turns the bears to bulls,” Ives said Tuesday.

On Tuesday, Apple shares closed up 0.48% at $111.31. Year to date, the stock is down by over 1%.

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