Apple’s not-so-boring Q3 2018: What the analysts are saying

Raising price targets nearly across the board. Who’s a trailing indicator now?

Excerpts from the notes I’ve seen. More as they come in.

Neil Cybart, Above Avalon: Apple is on a roll. Apple didn’t just report good 3Q18 results. Instead, Apple reported the latest of what has been a string of quarters going back to 2016 that demonstrate improved performance across a number of product categories. When looking at broader industry trends, it’s fair to describe Apple’s overall performance as shockingly good.

Katy Huberty, Morgan StanleyA clean beat on the path to $1 trillion. Third-quarter revenue beat expectations largely on iPhone average selling prices and Services with wearables maintaining momentum from previous quarters. September-quarter guidance also topped expectations and reflects a similar mid teens revenue growth rate for the overall company despite the more difficult compare from a year ago. The combination of a strong macro environment and an increasingly engaged customer base led to double digit growth in all regions on a sell-in basis during the June quarter. A clean beat on the path to $1 trillion. Buy. $232.

Amit Daryanani, RBC: Hit Snooze for 90 Days. Path to Trillion Intact. Apple reported a modest June-quarter beat and guided Sept-quarter ahead of expectations. Given heightened concerns around large-cap tech and ongoing U.S./China tariff issues, this was a positive print vs. expectations. While we expect investors to wait for pricing clarity on next gen iPhones before deciding on Apple stock, near-term upward bias on the name remains given multiple tailwinds stacking up. While investors looking for a ‘super cycle’ will remain disappointed, Apple’s narrative is shifting towards their ability to sustain mid-single digit sales growth despite flat iPhone units and low-to-mid teens EPS growth via buybacks. Outperform. Raises price target to $225 from $210.

Sherri Scribner, Deutsche Bank: Apple reported better-than-expected third-fiscal-quarter 2018 results with sales upside driven by iPhone, Services, and Wearables. While sales beat, iPhone unit growth of just 1 percent year over year remained lackluster, as iPhone sales upside continues to come from the reset higher in average selling price. Earnings per share beat expectations by $0.18, but we estimate that just $0.04 of the beat came from revenue upside, while the remaining $0.14 was helped by below-the-line items like higher other income, a lower tax rate, and buybacks. Given its revenue base and size, Apple’s recent growth has been impressive. However, with 80 percent of the company’s sales exposed to secularly challenged businesses, we believe the long-term growth outlook remains limited. We continue to see support for the shares from the company’s substantial share buyback, however, with positives and negatives largely balanced at current levels, we view valuation as fair and maintain our Hold. $175. 

Jim Suva, Citi: We believe the negativity on Apple stock is overdone and the majority of our thesis remains unchanged regarding ‘Applewood & 5 Reasons the Stock Should Trade Higher’ as detailed in this report. Specifically we highlight our view of Applewood which is Apple’s growth in service 31 percent year over year or 28 percent excluding one-time items which now represent 18 percent of Apple’s total revenues coupled with early innings growth of iPhone units in emerging markets and less than 2 percent share in India, thereby driving a growing sticky user base, which we have dubbed Applewood. Buy. 

Wamsi Mohan, Merrill Lynch: Five reasons why we believe Apple stock should outperform include: underlying iPhone demand remains strong and average selling prices are moving higher, gross margin has upside in fiscal 2019 given tailwinds from component cost reductions and potential tailwinds from foreign exchange, continued strong capital returns with $90 billion of buyback authorization remaining, continued strong growth in Services revenue across geographies (broad-based strength with contribution from licensing, App Store and Apple Care in the quarter), and strong demand for wearables (Apple watch grew mid 40 percent year over year and AirPods remain in high demand) drove 60 percent year over year growth. Buy. $230.

Timothy Arcuri, UBS: Yes, inventory is the highest in memory for a second calendar quarter (primarily component related, should burn completely off in CQ3) but implied iPhone units of 47 million to 48 million for CQ3 was spot in-line + services seem to be hitting an inflection. Apple is also effectively managing through some challenges on the cost side that should abate, though continued devaluation of key currencies like Chinese Yuan are an overall negative that bears watching. Given ecosystem switching which has become nearly non-existent, we think of iPhone as a recurring model in much the same way as services – albeit without much growth until there is a major form-factor change. Fortunately, this is on the horizon with foldable. In the meantime, Apple should at least hold serve with iPhone bias more to the upside based on procurement, average selling price still strong in the $720 to $725 range for the third calendar quarter, and services set to do about $3 per share in calendar 2020. Buy. $210. 

Chris Caso, Raymond James: We reiterate our Market Perform rating on Apple. June quarter results were slightly ahead of expectations; the variance vs. expectations was small enough that we expect neither bears nor bulls to change their view following this report. Apple’s rubber meets the road once the new phones come on sale, and we don’t expect the fall lineup to be different enough to improve the trajectory of iPhone sales. The Services business now represents the bull case for the stock, but our view is that it will be difficult for Apple to sustain the current rate of services growth due to a large portion tied to device sales coupled with a law of large numbers issue from App Store contribution. Market perform. 

Rod Hall, Goldman Sachs: Strong iPhone ASPs demonstrate resilient demand. Apple demonstrated better demand resiliency than we had expected in the Summer as evidenced by an iPhone ASP of $724 which was 5% ahead of our forecast. Guidance was just a touch ahead of our numbers but is consistent with our above Street ASP estimates that are based on a detailed SKU level model. We believe Street forecasts are likely to move up but that ASP expectations probably will remain too low for the December quarter as Apple continues to see support from ongoing mix toward higher average prices. Services growth adjusted for one offs dipped slightly but not that materially to 28% Y/Y from 31% last quarter. Our CY’19 EBIT estimates move up by ~3% but our CY’19 EPS moves down by ~1% to $14.75 as we lower our buyback assumptions. Neutral. Raises price target to $200 from $164 (!)

Ben Thompson, Stratechery: A fantastic place to be from a financial perspective. Thanks to Apple’s firm hold on the premium end of the market, as long as smartphones are the dominant computing platform, all three revenue streams should continue unimpeded: smartphones wear out, get lost or broken, and of course the premium end of the market is more likely to upgrade for the latest features; services revenue is almost entirely for consumables and subscriptions, which means it will never end; and additional devices not only wear down and get lost but also are building from a much lower base than iPhones even as they have about as good a go-to-market opportunity there can be for anything hardware related.

Andrew Uerkwitz, Oppenheimer: Our mid-term theses remain unchanged; we are unconvinced that iPhone can remain competitive among the upcoming wave of flagships. Longer term, we expect niche market segments (IoT) and services (voice) to erode Apple’s smartphone-centric platform advantage. Hold. 

Tim Long, BMO: Lots of positives. We are impressed by the iPhone ASP, which bucked normal seasonality. We had expected more of a hit from price elasticity, but consumers are still buying higher-priced devices. Services continue to grow near 30% y/y thanks to growing subscription businesses and a higher iPhone installed base. We estimate Services at 16% of revenues in FY19. Other products grew by 37% to get to 7% of total revenue, driven by wearables. Apple has a net cash position of $129 billion, which means we should see many more quarters of aggressive buybacks like the last two. Market perform. Raises price target to $199 from $184.

Jun Zhang, Rosenblatt: Better Guidance than Feared. Based on our research, we believe consumers will start trending towards buying smartphone models with higher memory capacity. This should lead to higher margins for smartphone companies, due to a higher ASP for these mod- els. With Apple potentially increasing their margins in the September quarter, this could attribute to cost reduction in the new iPhone models, especially for the new iPhone model. Overall, we are positive on Apple, as we believe the company will continue to generate strong iPhone shipments, strong service revenues, and increase margins. Buy. Raises price target to $200 from $190.

Robert Cihra, Guggenheim: Cutting through the noise. We see Apple’s beat+raise once again driven by upside in iPhone ASPs and Services growth, with the first being key to offsetting mature smartphone unit growth and the second to expanding its P/E. Sep-qtr guide looks strong into an upcoming iPhone refresh that we continue to see coming on time, with larger screen sizes noticeably absent from last year’s X launch, and setting up our forecast for at least modest unit re-acceleration just in time for ASP increases that start to anniversary in FY19E… Looking toward its Sep-qtr refresh, we continue to see iPhone component suppliers having now burned off their inventory from 2H17 over-builds and starting to re-accelerate 2H18E production.  Buy. Raises price target to $235 from $225. 

Michael Olson, Piper Jaffray: Guide suggests iPhone optimism. We are raising our AAPL price target to $218 from $214. Our price target multiple remains unchanged at 16x CY19E EPS, but is now based on EPS of $13.61 (previously $13.35). We remain confident in this price target multiple due to solid iPhone units & ASP and Sept. qtr guidance, along with optimism related to a wider array of “X-gen” devices coming later this year. Overweight. Raises price target to $218 from $214. 

Gene Munster, Loup Ventures: The big picture. Apple’s June quarter results are evidence that the Apple story is moving away from a focus on the iPhone toward a more predictable Services-driven business that returns $25B in capital to investors each quarter. These results support our Apple as a Service thesis, which has the potential to move shares dramatically higher as investors get more comfortable with the theme.

Aaron Rakers, Wells Fargo: Our Call. Apple delivered strong F3Q18 result at $53.3B / $2.34 ahead of our $52.2B / $2.21 (street: $52.3B / $2.16). We think investor will be focused on: (1) Continue iPhone ASP strength ($724 vs. our $705 and street $697 estimates) with ongoing demand for premium models (iPhone X & 8/+) ahead of an upcoming iPhone refresh. (2) Services momentum continues with adjusted growth at +28% yr/yr and new record revenue for App Store, Music, Apple Pay, AppleCare and iCloud; paid subscriptions +30M q/q to 300M (vs. 185M a year ago). (3) Early innings of $100B stock repurchase (no expiry) – Apple spent $20.7B on share repo in F3Q18, including the completion of $10B pre-existing authorization. Market perform. Raises price target to $210 from $195. 

Walter Piecyk, BTIG: iPhone Still A Star Despite Record Low Upgrade Rates. iPhone revenue grew by over 20% despite smartphone upgrade rates being at historic lows. We believe there are early signs that upgrade rates might be bottoming, which could provide an additional tailwind to our estimates that are now above consensus… Growth in R&D expense has outpaced revenue growth in 24 of the past 25 quarters, a reflection of Apple’s dedication to continue to invest for new growth opportunities. Buy. Raises price target to $235 from $207.

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  1. David Drinkwater said:

    Gene Munster: “a more predictable Services-driven business that returns $25B in capital to investors each quarter”

    At 4.8bn shares outstanding that turns into ~$25/share/year. Call it $20/share/year if you want to be more conservative. It’s not a direct dividend, but it’s an astonishing amount of money. It’s better than a 10% yield!

    Maybe at some point, once Apple is fully cash neutral, I can see that slowing down (a bit), but they will still be bringing in ridiculous cash flows (and presumably returning them).

    As I think about the cash in the meantime, I think I can see another piece of the market’s objection: Apple’s cash is very little different than “inventory” in a manufacturing facility. It is, of course, more liquid, but inventory is a dirty word in manufacturing. So I think Apple is definitely “doing the right thing” by reducing it. The fact that I am doing well by that process is an extra added bonus.

    August 1, 2018
  2. Ken Cheng said:

    “our CY’19 EPS moves down by ~1% to $14.75 as we lower our buyback assumptions. Neutral. Raises price target to $200 from $164 (!)” — Rod Hall, GS

    What?!? He had a 11x multiple on Apple’s 2019 EPS?

    August 1, 2018
    • Michael Thompson said:

      Does that surprise you from Rod Hall? Look at his history of calls on Apple at both JP Morgan and GS.


      August 1, 2018
  3. Jonny Tilney said:

    I’m not going to be very erudite.. a good portion of those clowns simply cannot learn lessons from the past. All things considered, quite appalling really.

    August 1, 2018

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