Apple's not-disastrous Q1: What the analysts are saying

Excerpts from the reactions I've seen. More as they come in, new ones on top.

Katy Huberty, Morgan Stanley: More Modest iPhone Growth Offset by Strong Services and Capital Return. On the one hand, FY18 growth will come more from ASPs (+12% Y/Y) than unit growth (+4% Y/Y) as the smartphone end market matures, lowering our EPS by 9% in FY18. On the other hand, the Apple platform is healthy. Device installed base grew 30% over the past two years and customer satisfaction is at record highs. This translates to growing share of smartphone users even as overall market growth slows. Given strong retention rates, Apple will see ASPs rise this year without any slowing of user growth. Overweight. Raises price target to $203 from $200.

Toni Sacconghi, Bernstein: iPhone 6S Deja Vu? We are downgrading AAPL from Outperform to Market-Perform, and lowering our price target from $195 to $170... While Apple may launch a huge buyback, bolstering earnings for the next several years, we wonder if that is already priced into the stock, and note that Apple's longer term tax rate is likely to increase from FY 18 levels (perhaps to 18%)... We underscore that are we are not calling for material underperformance in APPL, nor are we underestimating Apple's potential to rebound. Apple is a formidable company, with a war chest of cash, $14B in annual R&D, and a burgeoning services business. That said, the stock is trading at the midpoint of its recent historical valuation ranges, and we believe risk reward is coming more into balance, particularly since it is unclear what catalysts might exist for the shares in the near-to-medium term. Downgrades to Market Perform from Outperform. Lowers price target to $170 from $195.

Stephen Turner, Hilliard Lyons: We expect y/y iPhone revenue growth in FQ2 of 24% y/y on easier comparisons and higher ASPs. We no longer forecast a significant upgrade cycle but we do believe consumers will upgrade to higher priced phones when they choose to upgrade, which may be slightly elongated due to higher prices and other inflationary pressures. As such, our unit sales expectations have declined, while our ASPs have increased significantly. This view could change on a potential launch of a lower cost iPhone SE upgrade. Upgrades to Buy. Raises price target to $194 from $192.

Jun Zhang, Rosenblatt: Focus Turns to 2H18 Product Cycle. Management guided March quarter revenues to $60-62 billion, below consensus. We are lowering our March quarter estimate to $61 billion and with the lower guidance believe March quarter concerns are overblown. Our March quarter estimate assumes 6 million iPhone units that were manufactured in December will be sold in the quarter. Buy. $180.

Michael Olson, Piper Jaffray: iPhone Mix Better Than Feared. Apple reported revenue and EPS ahead of the Street, with March qtr guidance below consensus, as expected. For the Dec. qtr, EPS and revenue were both 1% above consensus, driven by the launch of the new iPhones, which shipped a total of 77.3M units (consensus was 80M). While iPhone units missed consensus, ASP was higher due to a strong mix of iPhone X. Services revenue was $8.47B (Street at $8.67B) and gross margin was 38.4% (consensus was 38.3%). Guidance for the March qtr is below consensus, but the company expects double digit iPhone revenue growth. Despite potential for ongoing uncertainty around iPhone X demand, we recommend owning AAPL on potential for a strong "super-long" cycle, which we expect will include a wider array of "X-gen" devices in the fall. Overweight. $200. 

Amit Daryanani, RBC: Impact on ADI, APH, AVGO, JBL, and more... We believe that given recent volatility seen in AAPL supply chain names, AAPL's Dec-qtr print and Mar-qtr guide are slightly positive for the Apple supply chain, especially considering the negativity into the print coupled with underlying sell-through data being better. Outperform. $205.

Abhey Lamba, Mizuho: Significant Increase In Capital Return Likely. We note that consensus had moved lower in the last few weeks and guidance came in even below that... Commentary indicated a step-up in capital returns via buybacks and dividends amid repatriation news flow. Although the company is likely to offer more details in April, we think the balance sheet can be used to fund over $150bn in capital returns over the coming years, which should help support the stock. We expect a stronger buyback program and bigger jump in quarterly dividend in April. Neutral. $175 (up from $160 Thursday). 

Tim Long, BMO: Some Good, Some Bad. Apple reported strong December quarter results, but we believe focus should be on the big guide down for March. The Street had expected $65.4B, and guidance came in more than $4B light at the midpoint. While we previously thought iPhone X demand would be strong into March given the late launch, we now see units lower. The better tax rate and expected capital return will help earnings, though we believe this masks the underlying challenges in the model. Market Perform. Raise price target to $166 from $162. 

Robert Cihra, Guggenheim: Smooth Jazz Over Heavy Metal. We think AAPL stock sets up even better now over the next 1-2 years, as people stop expecting some 1-year “super-cycle” but rather see the new iPhone X as a new high-end SKU introducing new technologies (e.g., OLED screens, 3D sensing, on-device ML, AR) that can drive ongoing MULTI-year upgrades, water-falling into lower-end models (not to mention naturally still adding an even larger-screen X Plus likely Sep-18E). Rather than a big CY18E then CY19E cliff, we continue to forecast iPhone units +6%Y/Y in CY18E vs. just flat in CY17E and -7%Y/Y in CY16, and then another +4%Y/Y in CY19E. Buy. $215. 

Amit Daryanani, RBC: (iPhone)X files: The Truth Is Out There. AAPL continues to execute impressively & its print/guide shows more than just iPhone units can drive sustainable revenue and EPS upside as current performance is driven by impressive growth in services (18% y/y, 27% adjusted for extra week), strong acceleration in ‘other’ driven by Watch & AirPod (36% y/y, ~42%E adjusted for extra week) and 15% y/y uptick in iPhone ASPs. Finally, AAPL’s target to over time have a net cash position implies it could return ~$163B of cash to shareholders, in addition to returning the $60B+ of annual FCF it generates. Outperform. Raises price target to $205 from $200. 

Gene Munster, Loup Ventures: Don't Overthink Apple. We attribute the after-market reversal in shares of AAPL to investors getting a handle during the call on Apple's long-term opportunity. Tim Cook went out of his way to reinforce Apple's massive and growing active device base. To summarize: 1.3B active devices including 240M Services subscribers. Couple this with the iPhone ASP increase of 15% y/y and the Apple story remains very compelling. We've updated our Apple model, available here. Apple sold 77.3M iPhones, below Street estimates at 80M. So, we were wrong; Apple didn't nail the 2017 iPhone launches. We think it was partly due to the more complex buying decision between iPhone 8 and iPhone X and partly due to the iPhone X's limited availability in the quarter. However, iPhone X has been the top-selling iPhone every week since it launched, which drove iPhone ASPs up 15% y/y to $796 vs. the Street at $756. Herein lies Apple's long-term opportunity: a growing active device base coupled with increasing revenue per device.

Walter Piecyk, BTIG: Revenue Guidance as Low as Feared. As we previewed in our note last week, FQ2 revenue guidance was $60 billion compared to a consensus estimate of $68 billion just a week ago. The consensus estimate implied a sequential rise in ASP in FQ2, but CFO Luca Maestri poured cold water on that theory during the call. We now estimate a 6.5% q/q decline in ASP in FQ2 versus our prior estimate of a 3.9% decline and yet CFO Luca Maestri appeared to be guiding to an even lower ASP... We are not changing our 2018 CY EPS estimate of $12.00 or price target of $198 as a lower tax rate assumption of 15% vs prior estimate of 19% was offset by lower gross margin estimates and lower contribution from Other income and expenses... The $796 iPhone ASP was higher than we expected in the quarter... As a result, we are bumping up our FQ2 iPhone ASP by $25 to $745 and lowering our unit estimate by 1 million to 52 million, which lifts our FQ2 total revenue estimate by $500 million to $60.9 billion, the mid-point of the guidance range of $60-$62 billion. Buy. $198. 

Daniel Ives, GBH: Good Enough December Results; All Focus on March Guidance and Weaker iPhone X Demand and “Ripping the Band-Aid Off.” The main event of tonight’s earnings is around the much anticipated March guidance cut with iPhone X demand weaker than expected, especially out of China and the US to a lesser extent hurting the company’s near-term outlook. March revenue guidance and gross margins were better than feared with total revenue of $61 billion better than the feared $59 billion to $60 billion whisper numbers that bears were clawing to and below the Street at $65.4 billion, with a guidance cut already well telegraphed through supply chain data points out of Asia. Highly Attractive. $205.

Tim Long, BMO: Quick Note: Weak Revenue Guidance. iPhone shipments of 77.3 million were worse than our/consensus 80.0 million, while ASP was $796, well above our/consensus $733/$756. Services revenues of $8.5 billion were slightly above our $8.4 billion. Results for iPads and Macs were weaker than expected. Greater China was up 11% y/y, which is well better than we expected... Based on our prior expectations for other segments, implied iPhone revenue guidance is $39.1 billion. This implies volume of 51-54 million, depending on ASP assumptions. By comparison, we were modeling iPhone units of 55.0 million and the street was expecting 58.5 million. Market Perform, $162.

Aaron Rakers, Wells Fargo: iPhone Channel Inventory Question. Apple reported iPhone channel inventory was: (1) at the low-end of targeted forward looking 5-7 week range, and (2) channel inventory grew less than 1 million compared to the December quarter a year ago (note: this compares to the historical disclosure of channel inventory increase / decrease on a sequential basis). This leaves us to estimate a >3.5M seq. iPhone channel inventory increase, or the highest q/q channel inventory increase Apple has historically seen. Apple did note that F1Q18 channel fill should be considered vs. what is typically a March quarter event – thus resulting in lower March 2018 results vs. historical seasonality as the company reduces channel inventory; revenue impact also higher due to iPhone X ASP increase.Market Weight. $195. 

Gene Munster, Loup Ventures: Despite Miss, iPhone Franchise Intact. Despite the iPhone unit miss in the Dec-17 quarter, the iPhone franchise is intact. Apple's ability to command a premium has never been more clear; iPhone ASP's were up 14% y/y... We view a bet on shares of AAPL as a bet on the company's ability to transition from their existing iPhone platform to an augmented reality-driven platform in the future. But Apple stumbled in it's most recent effort to expand the iPhone product line with 2 new models in 2017 (iPhone 8 and iPhone X), one potential cause of the iPhone unit miss.

Bill Mauer, Seeking Alpha: Apple Earnings Were Just Fine. Going into the report, analysts were scrambling to cut estimates amidst rumors of iPhone X production cuts, which brought down shares from their recent all-time highs. As expected, the company beat for the holiday period but issued downbeat guidance for the current quarter. Overall though, the report was just fine.

D.M. Martins, Seeking Alpha: Not A Quarter To Brag About. Following a monster fiscal Q4 2017, Apple (AAPL) did not follow through with an equally impressive holiday quarter.  In the end, Apple's fiscal Q1 2018 results were certainly not disastrous, but they also failed to excite. iPhone seems to have hiccuped on unit sales, and the softness may carry into the next quarter, judging by the modest guidance. For the short term, I would not rule out some volatility in the stock price, particularly as the iPhone X seems to have failed to make a stronger statement in its first quarter of existence. But from a longer term perspective, there does not seem to be much about Apple's quarter that would make me concerned about the health of the business.

Robert Paul Laitao, Braeburn Group: While Apple is a customer relationship continuum, it’s also a cash generation behemoth. I look forward to the capital return program announcements in April and expect both a dividend increase and a sizable expansion of the share repurchase program. Rising revenue and high levels of operating income combined with lower tax rates and a dwindling number of shares outstanding create an enhanced value scenario for long-term shareholders.

Jeff F, Friend of the blog: The lower tax rate of 15% guided for March quarter is huge.  Based on trailing earnings and diluted shares outstanding for FQ1 2018, the lower tax rate applied to prior earnings produces an additional $1.24 EPS.  Using today’s P/E ratio of 18.22 (2/1/18), Apple’s share price is imputed to be worth an additional $22.51 per share.  Of course, it’s better than that because Apple is forecasting growth and there’s no consideration here for anticipated, much higher share buybacks to be announced after the March quarter.

3 Comments

  1. Ken Cheng said:
    “Finally, AAPL’s target to over time have a net cash position implies it could return ~$163B of cash to shareholders, in addition to returning the $60B+ of annual FCF it generates” –Amit Daryanani, RBC

    Not my take. Returning $163B would leave no working capital, makes no sense.

    Tim said, “we are targeting to become approximately net cash neutral over time”

    Luca said, “you’ve seen that effectively we were returning to our investors essentially about one hundred percent of our free cash flow”.

    Then Daryani said, “When you talk about reducing Apple’s net cash levels to zero effectively over time, I think that implies the number goes from 163 billion today to something like zero”

    My take is “net cash neutral” is not the same as taking Apple’s net cash position of $163B and reducing it to zero. It means keeping a target cash position and keeping it approx. level, ie neutral. I’ve long held the belief and have stated it on this site in the past that Apple would hold a net cash position of $100B, and the excess would be returned to shareholders. Maintaining working capital at approx. $100B would be net cash neutral.

    I’ve always assumed that the target cash level has always been $100B. Apple began its capital return program just as it passed $100B. Steve always liked big round numbers, which he liked to state in keynote intros. And, Steve had been increasingly asked about Apple’s large cash balance which clearly irritated him. Even before it happened, I always expected that something would happen when Apple breached $100B, and it did. Unfortunately, it was a few months after Steve’s passing, which of course triggered tons of silly stories about Steve turning in his grave as he’d never issue dividends. Nonsense.

    And, at the end of the conference call Tim stated to Daryani, “What Luca’s saying is not cash equals zero. He’s saying there there’s an equal amount of cash and debt. And that they balance to zero.” I think the first part is correct, net cash does not equal zero. The rest I think Tim, himself was confused. Luca never said the word “zero”, that was all Daryani. The point is, Tim saw Daryani drawing the wrong conclusion, but didn’t quite understand what Daryani was getting at.

    And lastly, think about what being “net cash neutral” means for shareholders? It means once Apple’s cash balance is above whatever target level for working cap is reached, let’s say $100B as I propose, then the excess is returned as buybacks or dividends. Apple just made $20B last quarter, they could conceivably return all of that as dividends, or about $3.92 a share. Of course they won’t do that, they’ll likely use most for share repurchases, but it gives an idea of the scale of how much MORE Apple is intending to return to shareholders than it already is.

    2
    February 1, 2018
    • Kirk Burgess said:
      @Ken Cheng: Returning $163 Billion to shareholders would still leave $122 Billion cash on hand as working capital (this renaiining cash would be offset by the $122 Billion in debt to leave “zero” net cash).

      3
      February 2, 2018
  2. Fred Stein said:
    Interesting comparison: Q4, Q1, Q4 vs. year ago:
    $178.1B in 40 weeks
    $202.17 in 39 weeks.
    +13% YoY Growth for 3 qtrs; – + 16% YoY Growth on a per week basis.

    Apple turns 42 years old in April. Pretty spry.

    The big take home was Tim Cook saying twice – ‘next ten years” Apple will invest heavily in the components in some way. The OLED screens are by far the biggest cost item in the X. Apple will ship Billions of OLED screens on the next 10 years. Just one example.

    Hardware and components may be BORING. But Apple has the scale to massively out-invest the competition in this arena.

    0
    February 2, 2018

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