Apple's revised guidance: What the analysts are saying

Price target cuts across the board, ratings mostly unchanged.

Excerpts from the notes I've seen:

Toni Sacconaghi, Bernstein: Yes, Apple Pre-Announced... Our Key Take-aways and What to Do Now. While no one is likely to be surprised by Apple’s December quarter miss, the magnitude of the fall-off in iPhones (14% in revenue terms) is likely worse than most expected... Apple squarely attributed its shortfall to China but iPhone revenues outside of China still appeared to fall $3B+ short of Apple's expectations... Perhaps in part because there are no easy fixes, Apple failed to acknowledge the possibility that current iPhone prices are simply too high (stunningly, we note that iPhones prices are nearly 5x higher than the average non-Apple smartphone sold globally)... Our analysis suggests that AAPL doesn't work until estimates bottom, and we see some risk to FY Q2 guidance, suggesting that investors may want to wait to build positions.  Market Perform. Cut price target to $160 from $210

Rod Hall, Goldman Sachs: Negative Pre-announcement as EM/China demand environment remains weak. Apple’s guidance cut confirms our negative view on demand in China that we have been flagging since late September. Neutral. Cut price target to $140 from $182. 

Pierre Ferragu, New Street Research: Apple Upgrade: Our thesis has played out in full and things are as bad as they can be. Rating upgrade to Neutral from Sell. Price target cut to $140 from $165. 

Wamsi Mohan, Merrill Lynch: Rare miss but weakness likely to extend beyond Dec qtr. Although the trade tensions with China could ease in 1H19, the broader demand weakness and slower upgrade cycles are likely to push units much lower in F19 (we now model 181mn units down from 210mn previously). Our downgrade late last year was predicated on a weaker China but demand seems to have deteriorated materially over the past two months. Neutral. Cut price target to $195 from $220.

Michael Olson, Piper Jaffray: Dec Qtr Pre-Release Largely Due to China Weakness. China macro weakness was specifically highlighted as a primary reason for the miss, with that weakness being exacerbated by trade tensions with the U.S. and the stronger U.S. Dollar, among other factors. Overweight. Cut price target to $187 from $222.

Jun Zhang, Rosenblatt: More Headwinds Expected in March Quarter.  In addition to China weakness, we believe product pricing may be another reason other markets are not seeing much growth. We believe the downside guidance reflects December quarter production cuts, and we expect the March quarter to be much weaker than normal seasonality. Neutral. $165. 

Samik Chatterjee, J.P. Morgan: iPhone Volume Woes Continue on Cyclical Headwinds. Although preliminary F1Q19 results were quite disappointing, we see silver linings in: 1) better than expected ~27% y/y growth in Services revenue despite moratorium on app approvals in China; 2) strong growth and all-time high count of active devices in the installed base; 3) strong growth of ~50% y/y in wearables (Watch+ Airpods) demonstrating ability to leverage the large installed base to drive ancillary revenues; 4) strong non-iPhone revenue growth of +19% y/y. Overweight. Cut price target to $228 from $266. 

Timothy Arcuri, UBS: CQ4 neg-pre on weak China demand. AAPL will no longer discuss iPhone units, but given our view that shortfall was primarily iPhone XR-related, results imply ~64MM units (vs ~73.5MM guide) and iPhone revenue down ~15% Y/Y – the worst CQ4 for iPhone by far. Buy. Cut price target to $180 from $210. 

Daniel Ives, Wedbush: Apple's Darkest Day in the iPhone Era. Staying bullish on the Apple story despite last night’s “black eye” results. It would be easy to throw in the white towel on the Apple story this morning and declare the iPhone growth story is dead in the water after a historic decade+ run that kicked off when Steve Jobs unveiled the iPhone in January 2007. To this point, while last night is a bitter pill to swallow and will pressure shares, we believe going forward this is an installed base story of 750 million active iPhones worldwide with 350 million of those in the current window of an upgrade opportunity over the next 12 to 18 months. Outperform. Cut price target to $200 from $275.

Gene Munster, Loup Ventures: Bridging the Gap Between Perception and Reality. AAPL stock is now at a crossroads. Some investors will consider the stock broken and never reward it with a "proper" multiple, but we've followed the company long enough to know there is cyclicality in the market's relationship with Apple.

Walter Piecyk, BTIG: Cutting Apple Target As iPhones Miss By More Than 12 Million. We estimate iPhone units sales were less than 64 million in the December quarter, an 18% decline from last year. That’s the largest decline in unit sales since the March 2016 quarter following the launch of the iPhone 6S when unit sales declined 16%. We expect iPhone unit sales to drop to 42.5 million in the March quarter, reflecting typical seasonal declines and implying a 19% decline from the prior year. This is clearly an important metric and one that Apple said they would no longer report when they issued guidance 63 days ago. It is not helpful to investors to not report this metric. Cut price target to $197 from $235.

Aaron Rakers, Wells Fargo: A multi-quarter challenge. While weaker-than-expected iPhone results have been widely anticipated since November (we think street expectations were still in the low-70M unit range; we now estimate a mid-60M iPhone ship estimate), our industry checks leave us to believe that demand weakness, coupled with channel inventory burn-off, could persist for a few quarters. Market perform. Cut price target to $160 from $210.

Andrew Uerkwitz, Oppenheimer: Is This the First Crack? We would make the argument design and price may be the biggest issues at play, not macro... We don't think Apple is the only one with growth problems. We believe it's industry wide: higher prices, combined with fewer new features that provide real utility, are the biggest culprit. For Apple, we do worry this leads to margin degradation and a focus on what's the next cycle driver (5G, AR, healthcare?). Perform. No price target. 

Gene Munster, Loup Ventures (2): The Healing Process Begins. Tim Cook is at the top of his game. This may sound counterintuitive, given the negative Dec-18 results, but tough quarters will come and the team needs to rise to the occasion. Cook’s commentary on investor expectations, Apple’s talent, and its ability to innovate are spot on—a battle cry for the company and a sign of strong leadership. We don’t want to let them off the hook for bad forecasting, but there are more important things than quarterly forecasts, and Cook has his priorities straight.

Aaron Tilley, The Information: Apple Lowers Revenue Estimate for Important Holiday Season. Apple’s latest phones keep getting more and more expensive, a strategy that is colliding with the reality that consumers have to pay the full cost nowadays.

John Gruber, Daring Fireball: Apple’s Terrible No Good Very Bad Earnings Warning. I called “bullshit” (literally the word I used on my latest podcast) on the last two months of “iPhone sales are slower than Apple expected” stories and clearly I was wrong. I still think most of the reports were bullshit — particularly the ones based on reports from Asian suppliers — just bullshit that happened to turn out right for once, like a stopped watch getting the time right twice a day.

Ben Thompson, Stratechery: From the Archives: Apple’s China Problem. The fundamental issue is this: unlike the rest of the world, in China the most important layer of the smartphone stack is not the phone’s operating system. Rather, it is WeChat.

Neil Cybart, Above Avalon: It's China. There is going to be a debate regarding Apple’s fortunes in China. Everyone seems to be saying “told you so” when it comes to Apple in China, even though very few people were going around saying slowing economic growth would be the item that actually stings Apple in China. Cook’s commentary certainly doesn’t make one think conditions have improved in January. It’s not clear how Apple can turn things around other than there being some kind of U.S. / China trade relations breakthrough.  

Kara Swisher, New York Times: Is This the End of the Age of Apple? We need the next wave of innovation, and we need it now.

Guggenheim: Terminated Apple coverage with Robert Cihra's departure.

More as they come in.

See also:

16 Comments

  1. Gregg Thurman said:
    I have a problem, and they say that recognizing a problem is the first step to fixing it.

    My problem is that I’m an incurable optimist. My house could be burning down and I’d find solace in the fact that I won’t have to clean the kitchen.

    My problem is exacerbated by Apple-centric weblogs like Apple 3.0 (although I think Apple 3.0 is the best of them).

    Apple 3.0 is populated with Apple fanbois ( as am I) that are blind to negative reports about anything Apple. You almost can’t blame us for our blindness, these negative reports have proven to be so extraordinarily wrong in the past who would believe them.

    Pierre Ferragu is a prime example. He called $165 when AAPL was trading at above $200. He took a lot of criticism here and elsewhere, but he was right. “Supply chain” reports of weak iPhone demand were scoffed at, but they were right.

    It’s time we (especially me) clean up our assessment of negative news and start viewing all things Apple with a more jaundiced eye.

    So the optimist in me says there is a silver lining in missing December’s guidance, and that silver lining is realizing that a step back and giving a more balanced look at negative news is necessary.

    2
    January 3, 2019
    • Michael Thompson said:
      I’m in the exact position and have the same mindset that you have now about Apple and anti-Apple analysts/journalists/etc.

      The Apple growth story has been severely harmed. The iPhone will not be able to make us grow by itself.

      The credibility of all those that are uber-bulls (myself included), has been harmed.
      It turns out that NO ONE knows anything more than anyone else.

      1
      January 3, 2019
      • Gregg Thurman said:
        Hurts don’t it?

        There is no shortage of “experts” giving TC advice on what is wrong with Apple and the iPhone and how to fix both.

        The way I see it, the major problem is Chinese ethnocentricity, a weakening yuan (down 10% against the US% in the last 12 months) and political headwinds caused by the trade “negotiations”, compounded by a weakening Eurozone economy, as evidenced by the year-long decline in the FTSE, CAC, DAX and EURO Stoxx 50 indexes, leading to a stronger US$ against all these (and more) currencies.

        I don’t think pricing, in and of itself, of the latest iPhones are a problem. Where the strength of the US$ doesn’t matter (here in the US where the economy is running at nearly 100% employment), sales of iPhones are strong. People still want the iPhone, its a matter of decreased affordability brought about by weakening foreign economies.

        Apple can’t fix the world’s economy, so sales of Apple hardware are going to languish for the rest of 2019 (in my opinion). The bright spot will be the direction Apple was headed before this all came crashing down: Services.

        0
        January 3, 2019
        • Gregg Thurman said:
          My December quarter EPS estimate is $4.16. I’m not seeing EPS growth for FY2019

          0
          January 3, 2019
  2. S Lawton said:
    Ouch. AAPL is hurting the market as well. My fear is that Apple is the canary in the coal mine this quarter.

    0
    January 3, 2019
  3. Fred Stein said:
    Some gems:

    Ben Thompson on WeChat. This makes the phone OS and upgrades less important.

    Others highlight price. The X series upgrade worked great until Apple pretty much saturated their high end market segment. It’s ironic. Part of Apple’s success is that the phones are so good. They last a long time. A significant portion of iPhone owners just need a reliable phone with a good enough camera. They remain loyal, but don’t need to upgrade and don’t wish to spend much on Apple.

    AAPL remains a great investment, more so at today’s prices.

    0
    January 3, 2019
    • Robert Paul Leitao said:
      Fred:

      As we know, the useful life of an iPhone has elongated. Upgrades will fuel new iPhone sales for years but not at record levels. In my view, the goal is Services attachment and that will happen as the installed base of iPhones users continues to grow and the market for pre-owned iPhones continues to rise at double-digit rates.

      I don’t think there’s reason for Apple to modify its current strategy. There is every reason to better explain the company’s strategic plan and focus.

      Apple must continue to innovate and innovation is expensive. While new iPhone unit sales have been in decline since FY2015, Services revenue is rising at double-digit rates. Theres no reason to change the company’s iPhone strategy by pushing out less expensive but not advanced handsets. That would compete for sales with pre-owned iPhones with the same legacy technology and reduce pre-owned iPhone prices. The pre-owned iPhone market provides its own subsidy to support new iPhone prices.

      I believe management needs to explain a bit more about its strategy. Maybe now the market can begin to get past its obsession with new iPhone unit sales numbers.

      I agree Apple continues to be a great investment.

      1
      January 3, 2019
      • David Drinkwater said:
        I’ll bet that, with relatively little effort, Apple could provide a compelling history of services revenue growth over the last 4 years (2015-18). I hope they have the sense to do that. I think that looking at the history of the future reported metrics will put them in good context. And hopefully make the January 2019 report on 2029FQ1 look a bit better.

        0
        January 3, 2019
  4. Gregg Thurman said:
    Looking forward to the next earnings report I’m seeing (based on yesterday’s warning) revenue at $83.906 Billion, with March quarter revenue guidance of $57 Billion to $59 Billion (based on historical March quarter declines from December results).

    Top line guidance above $60 Billion will be a positive IMO.

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    January 3, 2019
  5. David Emery said:
    Apple is down more than $15 to $142 (round numbers, around 3:00 Thursday).

    My concern is the stock has dug such a big hole that it’ll be difficult for it to recover, independent of “fair value.” It’s at roughly 2/3 of its peak valuation.

    What would Apple need to show to recover? Substantial change in revenue? A jump in Earnings per Share? A big increase in dividends? What we know historically is that P/E ratio doesn’t seem to have any influence on the stock price.

    0
    January 3, 2019
    • Dan Scropos said:
      Services margin might be the key. When Apple can show a consistent sort of high margin evergreen profit, something that can be counted on, the Street might be willing to pay more for shares.

      As it stands, I’m a pretty shaken investor that went “all in” at $175 and then $155, so I’m the wrong person to be making predictions. Alas, I hope we don’t see $160 all year. At this point, assuming we get back on track in China and with new products, this lousy share price presents value for $130 billion. We could see the float at sub-4 billion in early 2020 and I’m okay with $150 until then.

      0
      January 3, 2019

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