Apple Inc Stock: Will Tim Cook's Gamble Pay Off?

Apple Inc (NASDAQ:AAPL) stock is under pressure due to concerns of a weaker than expected iPhone supercycle.

Apple Inc Stock Will Tim Cooks Gamble Pay Off

After loosing over 8% since the beginning of September, shares of Cupertino based tech giant Apple, Inc. (NASDAQ:AAPL) seem to have found support from the 100-day moving average. However, Apple stock is still under pressure as mixed reviews of its recent launch event held in the Steve Jobs theater and the recent analyst commentary have led to a rise in the bearish sentiment around Apple stock. Apple stock is up over 33% in the hope of a major iPhone Supercycle. However, there are rising concerns that lower than expected number of customers will purchase the recent models. Tim Cook's gamble of higher-priced iPhone seems to have taken a toll on the iPhone demand.

rise in bearish sentiment in Apple stock after iPhone launch

Lower demand for latest iPhone models?

While iPhone X is still not available for order, sales of iPhone 8 began a fortnight ago on September 22nd. The initial response, especially in Asia was not that great. The lines in front of Apple stores were much smaller and pre-orders for iPhone 8 were much lower than previous years. According to a survey conducted by RBC Capital Markets, 64 percent of prospective iPhone buyers want an iPhone X, 8 Plus or 8. This is lower than 71 percent of prospective buyers who preferred an iPhone 7 or 7 Plus after its release last year.

The situation is similar in China where around 65.1% of prospective iPhone customers said they intend to buy one of the three new iPhone models. In comparison, 75.7% of prospective buyers had preferred the newly announced iPhone 7 or iPhone 7 Plus in September 2016. Apple has been losing market share in China as fewer customers were buying an iPhone. There were speculations that consumers are holding back for the upcoming iPhone launch and analysts were expecting the newer models of iPhone to drive Apple's market share in the Chinese smartphone.

survey for iPhone 8 demand in China

Apple has taken a heavy beating in China as customers are buying competitively priced models from local players like Oppo, Vivo and Huwaie. The very expensive price tag of the newer models, especially iPhone X is proving as a stumbling block. A FTIC survey showed that consumers are preferring smartphones in the price range of Rmb2,000 to Rmb2,999, whereas iPhone X is likely to cost Rmb8,388.

Analysts remain bullish on Apple stock.

Lower demand for iPhone 8 forced Citi Research to lower its earnings and sales estimates for Apple's September quarter. It now expects Apple to miss on its Q4 street expectations due to lower-than-expected demand for the iPhone 8. But despite the "not so strong" demand for iPhone, most of the analysts continue to remain bullish on Apple stock. They are increasingly pinning their hopes on iPhone X. "We are not surprised that current ship times are quicker and lines shorter than prior launches, as we believe users will wait to compare to iPhone X before making a final purchase." Citi analyst Jim Suva had written in a note to clients.

Higher ASPs will more than compensate for lower volumes.

But, despite the weak iPhone 8 sales and expectations of an earnings miss, Citi has a price target of $170 on Apple stock, indicating around 10% upside from current price. RBC Capital too raised its Apple stock price target to $180 despite its survey showing a lower number of prospective iPhone customers willing to buy the newer model than last year. What could be the reason for this seeming anomaly? Well, the answer is higher ASPs.

Tim Cook's gamble to launch a $1000 phone. iPhone X starts at $999 for a 64 GB model, much higher than its previous versions. Interestingly, iPhone X doesn't have a 128 GB version. The next model available is a 256 GB version which costs around $1149. More than half of RBC capital's survey respondents who indicated an intention to buy the iPhone X said they’d choose the option with the higher storage. This means much higher ASPs to leading higher margins. The prices of iPhone 8 / iPhone 8 Plus are also higher than iPhone 7/ iPhone 7 Plus prices last year. Guggenheim expects a 17%Y/Y increase in iPhone ASPs to $770. Analysts expect the higher ASPs to more than makeup for the shortfall in demand. Tim Cook's gamble to launch a $1000 phone could payoff.

Apple stock could remain volatile going into its Q4 earnings results when we will get the first official picture on demand for the latest iPhone models. However, over the long term, we remain confident of Apple stock's prospects. Apple stock is part of our top stocks to buy from the tech sector which have outperformed the Nasdaq Composite by over 150%. Apart from iPhone sales, the service segment is also a strong growth driver for Apple.

Kumar Abhishek Kumar Abhishek   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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