- Analysts are starting to get more upbeat on Apple’s impending Mac refresh.
- I’m anticipating market share gain, stabilization in PC shipments to drive 10% sales growth in the PC segment.
- The next fiscal year is supportive of growth in all of the major consumer electronics categories, which reasserts my bullish thesis.
The PC market is starting to recover and it seems Apple Inc. (NASDAQ:AAPL) may have captured the right timing to launch its next generation MacBook Pro line-up. We haven’t seen a compelling product refresh in the Ultrabook category for quite a while, but with Apple releasing new incremental features, and heightened commentary from the sell side, investors should anticipate a return to growth in the PC segment in FY’17.
The key takeaway
On Augusts 20th 2016, analyst Amit Daryanani from RBC capital Markets mentioned that Apple’s upcoming refresh will return the company to growth. It’s worth noting that the analyst only anticipates 3% y/y sales growth in FY 2017, which is quite conservative, so next-year Apple should be in a reasonable position to sustain y/y earnings/sales beats.
Here was the key highlight from the analyst note:
While investors are rightfully focused on the upcoming iPhone 7 launch, we think AAPL could announce a MacBook Pro refresh (not done in last 4 years) sometime in CQ4:16, most likely at a separate event following the September iPhone event (possibly along with the traditional iPad refresh event). While Mac revenues represent ~10-15% of total AAPL sales, we think a product overhaul could be positive for Mac revenues which saw three consecutive quarters of y/y declines so far for FY16 and could return this segment to growth in FY17.
As Daryanani noted, the refresh should translate into some incremental revenue impact for Apple, Inc. despite the limited revenue mix of PCs when compared to smartphones. Furthermore, it’s hard to model the revenue ramp for the Mac segment upon refresh. While there are silver linings to the upcoming launch of the MacBook Pro, it’s worth noting that Apple’s market share has remained relatively stagnant in the PC space, according to Gartner.
However, the launch of a new device should sustain Apple’s market share above 80% in the $1,200+ (high-end) segment. When looking at overall PC trends, we’re starting to see recovery as we move through the trough parts of the current PC cycle.
I’ve mentioned in numerous articles that the PC market will eventually recover, as device fatigue wasn’t strictly limited to the PC market, but also smartphones and tablets as well. Despite the weakening environment on a broad basis for consumer electronics, the return to growth should be broad based across all major device categories as consumers have demonstrated that product segmentation alone is not enough to dissuade the use cases for both laptop and desktop PCs. There’s still demand for productivity devices, and while there’s some potential for cannibalization from the high-end Apple iPad Pro, it’s worth noting that the Ultrabook segment seems healthily insulated despite indications to the contrary.
So what should investors anticipate going into the next fiscal year?
I’m anticipating some recovery in demand for the broad PC market, perhaps low single-digit growth in 2017 seems attainable given the age of the current PC installed base and on-going efforts by both Apple and the Wintel alliance to revive the aged category.
Intel will provide its own guidance on consumer PC shipments at the next investor day, and I’m anticipating revenue guidance for the Client Computing Group to be in the range of 0% to 3% growth y/y.
Furthermore, fixed broadband penetration has been slow in emerging markets, but is expected to accelerate, which translates into heightened use cases for fixed computing devices. So, I feel fairly compelled that the PC will become a resurgent device category once there’s the accompanying internet infrastructure to support both desktop and laptops as opposed to smartphones. The PC market has high pricing sensitivity, but the one consistency is Apple’s overwhelming dominance in the premium category.
I’m anticipating PC shipments will stabilize at around 275 million units in 2017, which would imply very modest growth between CY 2016 and CY 2017. However, I’m anticipating Apple’s market share to reach 8 percentage points or more, which is a very modest share gain when compared to the 7.1% market share it had in Q2’16 (Gartner Statistics).
I’m anticipating Mac shipments of 21.94 million at an ASP of $1,250, implying revenue of $27.426 billion in FY’16, which compares to my FY’15 estimate of $24.948 billion. Apple’s market share in the high-end ($1,250+) will likely exceed 90% in FY’17, and 10% y/y in Mac revenue seems attainable.
These estimates seem somewhat aggressive. However, when factoring in pricing elasticity and historical market share trends whenever Apple releases a new line-up of PCs, I feel fairly confident about my PC estimate.
Furthermore, the iPad is starting to exhibit some y/y momentum in sales, which is implicit of sustained revenue growth in all of Apple’s lower performing categories. Hence, the next fiscal year should be full of earnings surprises as Apple’s growth seems fairly balanced across its various product categories as opposed to the heightened dependence on smartphones.
China wasn’t a factor this year, and next year shipments to Chinese consumer may slow further. However, the aged customer base provides enough supporting evidence that refresh fueled demand is supportive of low-teen revenue growth in all of Apple’s consumer electronics categories. In other words, the demand from North America, Europe and Japan will be the primary sources of growth, as the Chinese installed base is relatively new thus diminishing the likelihood of Chinese refresh fueled demand. However, the remaining geographic regions should exhibit more momentum, thus reducing the dependence on China’s emerging middle class.
As such, investors should continue to buy Apple shares in anticipation of major product launches. I continue to reiterate my buy recommendation. I’m also removing my price target until I conduct a full financial model update for FY’17.