- Analysts may be underestimating the long term contribution of the existing iPhone lineup.
- Foxconn continues to report record sales despite concerns that iPhone demand is waning.
- Considering that the Apple stock reacts positively to non-iPhone related news and it is valued at a 50% discount to the market, it could jump on earnings.
Foxconn reported record high sales for November; $15.8 billion. This headline caught my eye since Foxconn is the largest assembler of Apple (NASDAQ:AAPL) iPhones and iPads. November monthly sales hit a record high and market analysts attributed the better than expected results to orders from Apple since it accounts for more than 40% of Foxconn's total sales. Local press coverage of the announcement can be found here. Recently Taiwan Semiconductor (NYSE:TSM), which supplies chips to Apple, also predicted strong iPhone sales in 2016.
iPhone expectations are low
Up to this point, most analysts have been cautious about the level of demand for Apple iPhones. The Motley Fool even posted an article highlighting how weak demand for the iPhone 6s is pressuring the Apple stock. The stock initially sold off on these concerns but rallied when a Goldman Sachs analyst, highlighted it as a top pick for 2016.
Analysts are beginning to digest this information
While trying to dig into the implications of this announcement, I came across a fantastic research report from Stifel analyst, Aaron Rakers, Who regressed Foxconn + Pegatron results against Apples Total Revenue (ex-services). The correlation was pretty tight with the R squared=.86. According to Rakers, this would imply sales of $74.1 billion which is 5% above his current estimate.
In his note, Rakers also draws a correlation between China Mobile Phone Exports with Apple ex-China iPhone shipments. This hasn't even higher R squared of .922. If this correlation holds, it “would imply total Apple sales (ex-services) of $74.1 billion, or reflective of an implied ~4%-5% upside when compared to our current estimate”. I wouldn’t want to provide the full note but a summary of it can be found here.
Goldman call wasn’t iPhone related
The situation looks very interesting to me. Even though the stock sold off initially when there was conversation about weak demand for iPhones, the Goldman Sachs call that jumpstarted the recent rally had nothing to do with iPhone units. The analyst, Simona Jankowski, simply added the stock to the “Conviction Buy” list and said “over the next year, the focus will shift away from unit growth (which is slowing given a maturing smartphone market) to installed base monetization and recurring revenues (Apple as a Service)”. NOTHING about iPhone units stronger than expected which has been the driving force for the stock for several years.
Apple stock is very cheap on a relative basis
The S&P 500 is currently trading at a PE of 21.7 compared to Apple that is trading at a PE of 12.7. Should Apple really trade at a 50% discount to the market? If you think the company is going to see a decline in earnings yes but even if it misses consensus, earnings is unlikely to see a large decline.
I'm hardly a rocket scientist, but I can do simple math and it seems that reduced expectations and improving results are a recipe for stock price appreciation. I’m not an Apple PermaBull. I don’t even own a share, but I felt compelled to pass these data points along to people who could benefit.