Bernstein’s top Apple analyst sees striking similarities between the iPhone X/8 and iPhone 6S cycles.
From a note to clients—Sacconaghi’s second in four days—that landed in my inbox Monday:
In recent months, the pattern of Apple’s share price performance has been very similar to the early months of 2016, during Apple’s difficult iPhone 6S cycle. The parallels in stock performance between April 2016 and 2018 have been particularly striking (see Exhibit 3!).
The concern is that while iPhone expectations have come in considerably among investors over the last two weeks, they also did during the iPhone 6S cycle… but FY Q2 results and FY Q3 guidance still disappointed, and the stock underperformed materially following Q2 earnings. The current backdrop is reminiscent of 2016: supply chain reports have been unencouraging, and channel inventory was unusually elevated entering FY Q2 (and likely still is). Moreover, Apple’s relative valuation is actually higher (0.80x vs. 0.66x) than where it was at this point in the 6S cycle.
So, will history repeat itself? Bulls would argue that Apple’s recent underperformance has already priced in iPhone weakness, and Apple still possesses two wildcards to help FY18 earnings, including (1) increased buybacks, and (2) a potential new product announcement, e.g. the iPhone SE 2. Bears would argue that share repurchases and the impact of SE are not enough to offset a weak iPhone X/8 cycle, and that the iPhone business is structurally challenged – delivering flattish unit growth for the third consecutive year.
On net, we see risk-reward going into FQ2 earnings as neutral to slightly negative.
Maintains Market-Perform rating and $170 price target.
My take: Sacconaghi has a flair for the dramatic, posting a second negative note the day before earnings. Despite the sour note he struck, Apple closed up 1.8%.