From a note to clients by analyst Wamsi Mohan that landed in my inbox Thursday:
CQ2 iPhone units could see some downside Overnight, TSMC guided down CQ2 [Apple’s fiscal Q3], pointing to weakness in high-end smartphones. We are already modeling below-consensus units for Q2, at 40mn units vs. the Street at 42-43mn units for the June quarter, which we had lowered after our Asia trip last month. Given TSM’s guidance, we could see some additional downside to iPhone units of up to 5mn units for Q2, based on channel inventory dynamics.
Shipments likely higher than builds Although CQ2 builds are ticking down, the sell-in is likely to be higher. Q2 normally faces the challenge of late-in-cycle iPhones released in the prior year when the upcoming launches in September start to detract from sales. The weaker traction of the iPhone X in CQ1 likely was further magnified in CQ2, causing further order cuts…
iPhone weakness understood, magnitude could be higher In our opinion, investors are already expecting a weaker CQ2, but the magnitude could be surprising to some. We expect the shares to face some pressure heading into earnings, however, we view the long-term story as increasingly decoupled from iPhone cycles, morphing to one of capital return, services upside and stable hardware.
Reiterates Buy rating and (street-high) $220 price target.
My take: Wamsi’s $220 price target is based on a 16X multiple. That’s high for the Street and higher than Apple’s long-term historic range of 9 to 15 times next year’s earnings (median 12X). In his justification he mentions Apple’s large cash balance, the new repatriation tax laws, the potential for new end markets, the increasing mix of services and a strong upcoming iPhone X cycle. So to Mohan, a little near-term weakness is nothing to worry about.