A snapshot of Wall Street sentiment three days after the iPhone 7 event.
The graphic attached below comes from TipRanks, which tracks Apple analysts and ranks them according to their ratings success and investor returns.
BGC analyst Colin Gillis, with his “sell” rating and street-low $85 price target, is clearly an outlier.
Gillis was so confident that the new phone would be “treated with wide-spread ambivalence,” that he sent clients his bearish verdict on the new phone before it was unveiled. He prefaced his note, as usual, with a haiku:
The iPhone 7,
will not return the product,
to annual growth.
There aren’t many who would argue with that. But the analysts telling clients to buy Apple are, for the most part, looking ahead to 2017.
Probably enough to fill a book….
Apple has contributed to the selloff, of course. First they announce that they’ve discontinued announcing first weekend sales numbers. Then they announce that they have production constraints on the new iPhones, and consequently they’re sticking with their earlier low guidance. Neither of these has zip to do with how much demand there is for the 7 series, of course. But they lend credence to the prevalent meme that Apple is playing CYA (cover your ashtray) and hiding their true (low) expectations for demand. So the shorts have a field day.
This is yet another gift to the confident AAPL investor, of course, and that hopefully includes Apple itself. No, I’m not suggesting Apple did something as questionable as sandbagging in order to sink the stock price so they could buy more at a low price. They call it as they see it, and let the chips fall as they may.
The bottom line here is that the more AAPL’s price compresses, the more stock gets bought back by Apple, and the higher the eventual snapback when reality finally asserts itself.
Horace Deidu has verified the insanity of the market’s position on Apple over the long haul. Nice to know I’m not alone….
Selloff? Really? There’s only a “selloff” if one was expecting the share price to move significantly higher following this week’s announcements.
In my view, the share price dynamic has changed from the patterns of the past and it’s best to take a long-term view of Apple and consider not only the total return attributes of the equity, but a valuation model that considers the expanding customer base and the revenue growth potential on a per customer basis over time.
I don’t think supply of the new models will be chronically constrained through the first three months of the model year. Pre-orders have occurred earlier than last year and Apple continues to expand the launch regions. First weekend sales are an absolutely irrelevant statistic that does not provide any insight or guidance whatsoever on the performance of the latest flagship iPhone handsets over a 12-month period. It’s best to eliminate a meaningless statistic from the global conversation about the company’s products.
I don’t think Apple “sandbagged” September quarter guidance nor do I believe iPhone supply is or will be chronically constrained. As we know, the company’s fiscal performance and prospects for growth can be detached for long periods of time from the company’s share price performance. There’s no reason to expect Wall Street to suddenly change its valuation based on any particular product or news announcement.
“In my view…it’s best to take a long-term view of Apple…” As you know, we’re on the same page when it comes to that.
“I don’t think supply of the new models will be chronically constrained…” That one I’m not nearly as sure about. As you know, in something as complex as a new iPhone model, production is at the mercy of the weakest link.
“First weekend sales are an absolutely irrelevant statistic…” I completely agree.
“I don’t think Apple “sandbagged” September quarter guidance …” Neither do I.
“As we know, the company’s fiscal performance and prospects for growth can be detached for long periods of time from the company’s share price performance.” How well I know!
“There’s no reason to expect Wall Street to suddenly change its valuation based on any particular product or news announcement.” I expect Wall Street to be just as reactive in the future as they have been in the past, which is to say, when it comes to Apple, exceedingly reactive.
There’s a well-worn Wall Street adage, “Buy on rumor, sell on fact.” Consider also the broad market’s performance late in the week. The share price is not immune from broad market trends or near-term dynamics. Apple opened the holiday-shortened trading week at $106.90 and closed trading yesterday at $103.13, a decline of 3.5%. Meanwhile, the DJIA dropped 2.2% over the same period. I don’t consider Apple’s performance relative to the broad market significant or in any way a woeful “selloff” following this week’s announcements. Several large caps suffered share price declines particularly during the last trading day of the week.
In my view, while this week’s product announcements were impressive, the market needs data to move the share price higher. That data will be revealed over the next six months and particularly with the release of December quarter results and March quarter guidance. I’m confident the new flagship iPhone handsets will continue to attract new customers to the company’s expansive eco-system, prompt upgrades from the among the hundreds of millions of current iPhone owners and drive purchases of other products and services.
First, let’s not put words in my mouth – I never said the selloff was “woeful”. Second, if you look at the close on Wednesday of $108.36 and the close on Friday of $103.13, you get a difference of $5.23, or a 4.83% drop from the high. Or, looked at another way, you’d have to go up 5.07% from Friday’s close to regain the high of Wednesday’s close.
I call that a selloff. I get to do that, Robert.
You can call it whatever your want. Both the DJIA and the S&P 500 were off more than 2% in Friday trading. Even with the dip (I’ll call it a “dip”) following this week’s announcements, the shares are trading at the same level as on April 26th, the last trading session before the release of March quarter results and June quarter guidance.
I’ll give it a couple of more trading days before drawing any conclusions on the market’s response to this week’s event. Although much of what announced this week was widely anticipated, I was nonetheless impressed by the presentation. The announcements were pretty much in synch with the broad product and services plan management has outlined in narrative and in response to analyst questions during the recent quarterly conference calls.
Quick question: Did you expect the share price to move appreciably higher based on the strength of this week’s event?
Agreed. There have been many that discount the value of Services to Apple’s valuation. The truth is that Services may become the #2 revenue stream for Apple, ahead of Macs and iPads, this coming fiscal year.
Apple’s customer base is unlike any other. It is comprised of customers that, on average, are more apt to buy online, and in doing so buy more than (a lot more) than customers on a competing platform.
Marketing to a market tier that can’t afford, or chooses not to spend, is a fools game that leads ultimately to the firm’s demise.
Being able to largely ignore that tier is probably Apple’s greatest strength.
Apple also has nearly $11.50 billion in deferred revenue representing the value of services incumbent in the company’s contract to provide free operating system upgrades over the anticipated economic life of the customer’s device as well as services such as iCloud. That’s additional services revenue implicit in the purchase price of each device sold. The deferred revenue, representing the estimated value of the services, is recognized over the economic life of the each device sold. That revenue is recognized on the device revenue lines and not in the Services reporting segment.
My models suggest Services revenue will surpass revenue from the Mac product line and the iPad product line this fiscal year and exceed $24 billion in the fiscal year ending later this month.
Neither do I. Based on of this year’s launch I think Apple is going to sell about 15 million iPhone 7s in the September quarter., something Apple did not do with the iPhone 6S during its launch month.
I base that feeling on the fact that since introduction of the iPhone 5 all launches have begun in the September quarter. Prior to that, with two exceptions, all launches were in the June quarter,
iPhone 5, iPhone 5S, iPhone 6 and iPhone 7 launches all occurred with 9 days left in the fiscal quarter. Launch of the iPhone 6S occurred with 2 days left in the fiscal quarter.
I believe Apple changed the launch date for the iPhone 6S in order to prop December quarter sales of the iPhone 6S.
That means that by resuming a launch date with 9 days left in the fiscal year ,Apple does not feel the need to prop iPhone 7 December quarter unit sales
I feel Apple guided FQ4/2016 as it did, because, even with a 9 day surge of iPhone 7 sales contributing to results, iPhone 6S sales were bad enough to limit guidance.
I attribute the problem of iPhone 6S unit sales to the success of the iPhone 6, because the iPhone 6 pulled upgraders forward, depleting the installed base that would have ordinarily upgraded to the iPhone 6S.
The iPhone 7 will not suffer that pull forward effect, to the contrary, the pull forward effect increased the number of iPhone users that normally upgrade on a 2 year cycle occurring in FY2017.
Not true. For each of the last 6 quarters Apple has bought back (on average) 4.97% of the year earlier total shares outstanding.
FQ2/2015 5.23% YoY
FQ3/2015 4.60% YoY
FQ4/2015 4.85% YoY
FQ1/2016 4.89% YoY
FQ2/2016 5.04% YoY
FQ3/2016 5.2% YoY
In the 4 quarters prior to FQ2/2015 Apple was buying shares at the average YoY rate of 6.61%.
It appears to me that Apple is managing its share buyback irrespective of share price.
I’m modeling a share count reduction of 284,126,000 shares during FQ4/2016, 5% of prior year total shares outstanding, resulting in a share count of 5,398,393,000 reported in October.
Not true. For each of the last 6 quarters Apple has bought back (on average) 4.97% of the year earlier total shares outstanding.”
I put it badly. FOR A GIVEN INVESTMENT, “the more stock gets bought back by Apple”. Same investment amount/cheaper stock=more stock bought back.
Each of the analysts listed uses a unique valuation model. It’s to be expected among a group of more than 20 Wall Street analysts there will be at least one outlier to the downside. In my view, to move the share price significant higher price targets will need to rise. Price target revisions will be driven by data more than sentiment.
Only five months ago management began a new narrative on Services revenue and expanded on that narrative with analysis of “Installed Base Related Purchases” in late July. This narrative will take time to inculcate and the corresponding data will take time to be revealed.
Meanwhile, management is continuing with a massive share repurchase program which removes tens of millions of shares from the market each quarter at what may soon prove to be highly discounted prices.
Let’s work with that. This week, I had an opportunity to hear a presentation in San Francisco by Horace Deidu and Ben Bajarin. Horace coined a phrase that really struck me: “Apple didn’t become Chinese; China became Apple!”
For Apple to “win” the Chinese market, China had to evolve to the point where it saw what Apple had to offer as both desirable and accessible. For example, Tesla’s are highly desirable cars, but before they can become both desirable AND accessible to a potential customer, many pieces have to fall into place. The 4G build-out in China is a classic example.
In similar manner, India will need to “become Apple” in order for Apple to prosper there. But this is where it gets interesting: All the discussion, substantiated by Mr. Bajarin, is that smartphone growth has peaked. But “smartphone” is an overly broad category that includes devices that are little more than glorified feature phones. Advanced smartphones are a much smaller share of the market, for the simple reason that the infrastructure to completely make them shine isn’t there yet: Their usefulness is comparable to driving a Tesla down a road meant for oxcarts.
But that’s changing, and as the infrastructure gets laid down, the potential customer base for Apple expands. THAT is the element the “doom and “gloom” and “Apple has stopped growing” crowd completely ignores, just like they ignore the resale value of an iPhone and hammer on the original cost, and just like they ignore the major ecosystem gains that Apple users enjoy just by purchasing an Apple device.
It’s called “willful ignorance”.
I wholeheartedly agree. What good is a car that can go 225mph (my 2005 Ford GT) if the infrastructure can only support 40mph?
“According to a report by Bank of America Merrill Lynch, India is expected to have 90 million 4G subscribers from near zero at present, and a 4G smartphone base to reach 180 million by 2018 compared with 5 million in 2016.
The report further said that there will be a marginal difference between 3G and 4G tariffs, as well as a decline in smartphone prices that may lead 2G subscribers to leapfrog to 4G services, skipping 3G.
The report estimated the 4G market share of these big three telcos to surge from 53 percent in 2016-17 to 60 percent by 2019-20. However, it further added that Reliance Jio would have the largest subscriber market share in the 4G segment, and that by 2019-20, Jio will have close to a 40 percent share in the Indian 4G subscriber market.”
This is exactly what happened in China, and will happen in India. China’s appetite for iPhones has not diminished, the surge created by China Mobile, China Unicom and China Telecom’s 4G build out has largely passed because the build out is largely complete.
And just like China, its business rules and regulations were decidedly anti-business. As China relaxed those rules business flourished.
My brother-in-law is East Indian (now an American citizen). He tells me that India is undergoing a fundamental societal shift.
In the ’50s and ’60s there was a significant migration of India’s lower classes to North America and Western Europe, because of the lack of advancement opportunity in India. Over the years this group has flourished and many are returning to India with a sense of self-esteem and wealth that did not exist 50 years ago. Over the last 10 – 15 years they have been at the forefront of liberalizing India’s laws that have held back the lower classes for a millennia. The percentage of the population living below the poverty line has dropped from 50% to about 25% in the last 10 years because of this liberalization.
As India’s government continues down this path the Indian economy, and the wealth of its citizens, is only going to expand.
This is day One. People should not make the mistake of believing Apple will not do well in India because of Apple’s pricing and India’s present annual earnings per capita. That would be the same mistake made when Apple pushed into China 5 years ago.
In 6 weeks, Apple will provide guidance for Q1 FY’17, which will likely beat current analysts expectations based on iPhone 7 pre-orders. Soon after, the analysts will raise their targets. Note, several Jet Black models delivery dates are in November.
He’s perfect for CNBC’s clown show.