- I think the consensus estimates are a bit optimistic on iPhone sales estimates. Further, ASPs will be affected to a slight extent due to mix-shift to older devices.
- As a result of currency headwinds and ASPs, I adjust my EPS lower to reflect these additional headwinds.
- I revise my price target to $87.38 from $88.71 and anticipate the stock to struggle following its earnings announcement next week.
Could things get worse for Apple (NASDAQ:AAPL)? Well, it’s certainly possible as Apple reports earnings next week. Analysts are now anticipating ASP reductions in the most recent quarter in response to the mix-shift to prior generation models and negative currency impact. UBS anticipates that the shift to prior generation models will impact the WARP (weighted average retail prices) negatively by 1%. Of course, the adjustment to weighted average retail price models are based on survey data points, which are pretty reliable but not an absolute certainty.
Nonetheless, it’s worth mentioning that ASP trends will likely weaken going into the year, which will put further pressure on gross margins and top line sales for newer models. I’ve already modeled an aggressively pessimistic iPhone shipment figure for Q1’FY 16, so I’m not going to adjust my stance too much in response to the report from UBS, but it’s worth mentioning that things are heading south on numerous fronts with regards to Apple.
Here’s a brief excerpt from the UBS research report that was released on Wednesday:
It appears that iPhone shipments are worse than we initially expected due to slower upgrade demand in developed countries (search volume down 20% in the US). The CIRP (consumer intelligence research partners) survey highlights not demand but mix. It shows that 67% of Dec US iPhone sales were the newest 6s/6s+ models, down from the 75% new model mix last year.
The weakness in demand in conjunction with currency headwinds are the primary reasons why I’m a lot more pessimistic when compared to the sell side. UBS updated its financial model to reflect some currency impact, which is mostly due to the Chinese Yuan or RMB. Of course, the impact to gross profit was 2%, and they also reduced their ASPs by 4% to reflect the currency conversion. They’re a little optimistic here when compared to management’s guidance of 4-6 points of F/X impact, but it’s a start! Maybe, I’m wrong about currencies, but I’d really like to think Apple’s management team has a firm grip on its own currency exposure, as I’m operating off a 6% impact across all of its reporting segments. The currency issue isn’t simply isolated to China as the dollar strengthened when compared to many other currencies. With hedges likely to roll off in 2016, the impact to financial results are back-half weighted.
Apple could generate some momentum in Apple Watch towards the second quarter of its fiscal year. Perhaps at WWDC 2016, Apple will make some key announcement pertaining to the Apple Watch 2 and Apple TV set box. Apple continues to make progress on the content front, but a recent interview with John Skipper (President of ESPN) indicates that Apple’s struggling to come up with an immediately profitable streaming service. The Apple TV could be a needle mover when accompanied with streaming revenue, as the hardware alone is projected to generate$6.973 billion in sales according to UBS estimates.
I’m revising my estimates slightly lower to reflect a 6 percentage point impact from currencies, as the recent weakness in the Chinese Yuan wasn’t really accounted for, so I’m anticipating the currency impact will be at the high-end of Apple’s outlook range. I modify my ASP on Apple's iPhone lower by a dollar, and anticipate Mac/MacBook shipments to decline by 2% over the course of FY’16. I’m not anticipating a back half lift in Apple's iPhone 6S/6S+ shipments despite the fact that purchase intentions from surveys indicate some recovery in demand for Q3'16 to Q4’16. I believe consumers will wait until the launch of Apple's iPhone 7 prior to purchasing an iPhone, which will make Q1’17 a major quarter in terms of sales and earnings for Apple.
Summing Up My Apple Earnings Expectations
In light of these factors I’m adjusting my EPS estimate lower from $7.64 to $7.53 for FY’16. I revise my price target from $88.71 to $87.38 to reflect the added impact from currencies and ASPs on Apple's numbers. I’m more pessimistic than the entire sell-side, as the buy side community is operating off the assumption that sales will decline by around 10%. I believe sales will decline by 16.52% this year, as I anticipate demand weakness to be broadly distributed through the entire year. I’m anticipating iPhone shipments of 70 million in Q1’16, which is pretty aggressive when compared to the consensus estimate of 75 million. I arrive at this estimate after establishing the linear rate of iPhone shipment decline, which is based off of Foxconn's and Pegatron's preliminary monthly revenue figures.
While there are a lot of bullish voices backing Apple's stock right now, I'd rather wait till Apple shares slip below $90 a share. I think investors should avoid Apple shares going into Q1’16 earnings, as I believe Apple will struggle on both its outlook and headline figures. On the bright side, Apple will report earnings on 1/26/16, so investors won’t need to wait too long before reassessing their investment thesis.