- Sell-side analysts cut their Q1 iPhone estimates but have kept Apple price target unchanged.
- iPhone sales decline should push Apple to accelerate monetization of other business lines.
- Apple stock is a long term hold.
In a recent couple of months, we are witnessing an interesting process of sell-side analysts changing their opinion on Apple, expressing increased concerns about the company’s iPhone sales next year. That process was triggered by Credit Suisse report estimating that Apple has cut its component order by 10% after analyzing and aggregating results from many Apple components suppliers like Qualcomm (NASDAQ:QCOM)), Skyworks Solutions (NASDAQ:SWKS), Qorvo (NASDAQ:QRVO), and more. While other firms follow Credit Suisse's footsteps and express their concerns about iPhone sales almost, every firm kept a price target substantially higher than the current Apple stock price as shown in the chart below.
This dissonance between negative reports and high Apple stock price targets can highlight a few things, besides the discussion of sell-side analysis relevance in our days: first, analysts don’t believe that the disappointing iPhone sales will have a significant impact on the company’s performance and stock price. Second, analysts believe in the strength of Apple as a company to outperform the market regardless of slightly lower iPhone sales figures in one or two quarters. Even though financial media like to present this as a disaster, the reality is that in the long run, lower iPhone projections may push Apple to accelerate the monetization of other initiatives.
One of these initiatives is the next, low-cost iPhone, which is rumored to be a 4’’ metal case iPhone with NFC and Apple Pay support. Apple’s iPhone 6C is Apple’s second attempt to create a truly low-cost phone that meets the requirements of the entry-level smartphone market both in price and features. After the relative failure of Apple’s iPhone 5C, the new iPhone 6C is expected to distinguish itself from the iPhone 6S and enjoy a higher demand. The new low-cost iPhone will add sales volume to the iPhone segment. Another additive feature of the iPhone segment's sales volume is the upgrade program that guarantees a recurring volume of iPhone sales in the future.
Outside the iPhone segment, Apple is pushing to spread Apple Pay globally, penetrating the Chinese market in cooperation with Chinese Union Pay and 15 local banks. After Apple Pay's introduction in the U.K., Canada, and Australia and its planned introduction in some European markets next year, expanding into China was necessary for Apple to gain a significant worldwide market share.
The Chinese e-payments market is dominated by local players, with AliPay (Alibaba) being the largest one with almost 50% market share. When international players are absent from the Chinese e-payments market, Apple’s partnership with Union Pay, which is the third biggest player, together with the strong brand Apple has in China, could assist the tech giant to gain valuable market share there.
Besides the above initiatives, Apple has other balls in the air, like the automotive initiative and the original streaming service, which will come to fruition shortly. When sell-side analysts publish concerned reports about Apple’s sales volume in the upcoming quarter, they provide very narrow and shortsighted analysis that ignores expected sales of iPhone 6C, wide Apple Pay spread, and other emerging business lines that have not been validated yet.
I’m not following Apple blindly, thinking that it’s the best company in the world and that Apple stock price would rise no matter what. Definitely not. I’m just asking that you put the sell-side analysts’ ratings in perspective and look beyond the next quarter or two. The company still has a solid balance sheet, strong P&L, and plenty of new initiatives in the pipeline. Even though Apple stock price declined significantly in the last few days, I still believe Apple stock is a long term hold.