- Apple may struggle with iPhone shipments on earnings.
- However, there is upside in the form of buybacks and F/X.
- Despite these potential tailwinds, I'd be cautious going into the earnings report.
Things aren’t looking as hot going into Apple's (NASDAQ:AAPL) upcoming earnings report, and while I’m fairly confident that there could be some upside to top line results from foreign exchange translation, the outlook could be a little more grimacing than what the consensus was anticipating for back half FY’16. As such, investors should be a little more cautious going into the upcoming results despite the massive recovery in valuation we have experienced over the past couple months. Furthermore, as I had promised I will be updating my stance on the company, and am revising my price target higher to reflect prevailing investor sentiment on the company.
Mizuho Securities released a report on April 11th, cautioning investors of further weakness to near-term earnings/outlook due to channel checks from their Asian research team:
Based on our supply-chain checks, we think the company is likely to report about 49-50 million iPhone units for the quarter, which would be slightly below consensus of 50 million units, and ASPs could be lower too.
We are expecting total revenue outlook to be around $45-48 billion with gross margin around 38.0-39.0%, which compares with consensus of $48 billion and 39.2%, respectively. Segment-wise, we expect iPhone shipments to be slightly below current expectations. Based on our checks, we think management is likely to base its forecast on iPhone unit shipments and ASPs of about 42-43 million and $610-620, respectively, versus current consensus of about 44 million units and $647.
I forecasted fairly conservatively for the back half of the fiscal year, which is why I’m not really surprised by the weak outlook from channel checks. I believe additional channel checks will soon hit the investor base from the remaining investment banks, which could deflate some sentiment going into the upcoming earnings report. While there’s no denying that Apple trades at a compelling valuation, the incremental negative news on iPhone shipments will dampen the recent momentum of the stock.
Furthermore, the stock is struggling with the 200-day moving average (green line), which tends to be a heavily contested technical resistance level. While I am, by no means, a technical analyst, the recent rally could struggle with sustaining momentum given mixed implications on iPhone SE contribution to gross profitability in Q3’16 and Q4’16 and the below guidance implications. I’m assuming the remaining investment banks will brief their clients over the current week with their own channel checks, which will lead to a wave of analyst price target revisions prior to the announcement of earnings. As such, investors should get ahead of this by avoiding the stock prior to its earnings release, and waiting for confirmation of weak results to accumulate additional shares.
As it currently stands, I believe the company will report $1.95 EPS, which is higher than my prior estimate of $1.86 for the upcoming quarter. My estimate compares to the analyst consensus at $2.00 EPS. I’m anticipating revenue of $50 billion for this quarter (nice even round number), which is below the consensus at $52 billion. This estimate reflects some of Apple’s commentary on guidance and recent commentary on channel checks. While these figures could prove too conservative, I believe the incremental impact from currencies will get offset by below consensus iPhone shipments. The q-o-q impact from currencies will be far more substantial in Q2’16 when compared to the remaining quarters as F/X volatility will likely subside. As such, I revise my full-year estimate to reflect a 3% (prior 6%) impact from foreign currencies. I anticipate gross margins of 40%, which is above the high-end of the guidance range due to the drop-off of iPad shipments and increased mix of iPhone and software.
The higher margin categories will have an outsized effect in Q2’16, but eventually, I anticipate full-year gross margins to stabilize at roughly 39% following iPhone SE sales ramp in back half of 2016. Furthermore, I anticipate Apple to use up the remaining authorization in the current fiscal year, despite the authorization being extended to FY’17. Apple will likely increase its buyback authorization towards the end of April where they review their capital return policy.
After weighing the pros and cons going into the quarter, I believe a lot of the bullish arguments for buying the stock are already priced into the stock. For full-year results, I have revised my price target on the basis of multiple expansion (due to market sentiment), heightened share buyback authorization, revision to F/X impact, and slightly higher iPhone shipments. I reduce my iPad ASP estimate as it did not compose a significant portion of the sales mix despite survey results pointing to higher adoption rates.
I revise my price target from my prior estimate of $87.15 to $117.17. This doesn’t imply a whole lot of upside from current price of $112. However, I believe there could be incremental upside to my revenue forecast for Q4’16 assuming adoption of iPhone SE picks up. However, I remain conservative on my estimate because I anticipate similar seasonal sequential drop offs from Q1’. Even so, the buybacks should accelerate given the depressed value and revisions to buyback authorization. This is driving much of the EPS in consensus models, and I too am moving with the rest of the pack. That being the case, I didn’t find enough incremental positives from channel checks to revise my estimates on revenues too much higher. I attach a 13.91x multiple when compared to my 11.61x multiple as I anticipate the stock to move higher going into the release of the iPhone 7.
Therefore, I’m reiterating my prior buy recommendation from last week. After taking into consideration some weak data points though, I would wait to initiate another entry into the stock. I don’t anticipate guidance to be above the consensus for the next quarter. Despite these troubling indicators, investors are shifting their attention to next year results. Apple stock looks like a compelling buy for long-term investors as sales will likely stabilize and grow in the FY’17 timeframe.