Apple’s better-than-expected March quarter: What the analysts are saying

Price target increases nearly across the board.

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

Wamsi Mohan, Merrill Lynch: Where do where we go from here? We view meaningful upside potential in shares of Apple and move our PO to $230 given the following drivers post our upgrade in March: (1) iPhones/China have bottomed out and are improving, (2) Channel inventory normalizing where sell-in will match sell out better, (3) Resilient gross margins despite a qtr that saw significant discounting, (4) Benefits of trade-ins still in early days, (5) Services reacceleration in 2020 given the tailwind from new services, (6) Continued growth in installed base, (7) Strong capital return with an incremental $75bn in share repurchase authorization, (8) Dividend increase of 5%, (9) Strong growth in iPads, Macs (significant first time buyers) and wearables and (10) Positioning still negative and a relative underweight for most investors. Buy. Raises price target to $230 from $220. 

Katy Huberty, Morgan Stanley: March Q slightly better than expected, but the real surprise was June quarter guidance. June quarter guidance for a revenue decline of 8% Q/Q is materially better than historical seasonality of 13-16% Q/Q declines, and consensus view of -11% Q/Q heading into the print. Maintains Overweight, raises price target to $240 from $234. 

Toni Sacconaghi, Bernstein: Price Cutting To Victory. Apple’s fiscal Q2 was fine. Total revenues declined -5% year-over-year, vs. consensus at – 6%. Consistent with expectations, iPhone revenues declined -17%, and Services revenues grew +16%. EPS came in 10 cents above consensus, but in-line with our own estimates. Most importantly, Apple’s Q3 revenue guidance was much better than expected, at $52.5 – 54.5B vs. our expectation of $50 – 52B (and consensus at $52.1B). Apple largely ascribed the projected recovery to iPhone price cuts and trade-in discounts in Q2. While we consider this guide to be credible, we nonetheless struggle with its magnitude, as it essentially implies the most benign sequential Q3 iPhone revenue decline in history… right after Apple just experienced the worst Q2 sequential iPhone revenue decline in history. We forecast Q3 revenues of $53.3B, slightly below the midpoint of guidance. Market Perform. $190.

Samik Chatterjee, J.P. Morgan: Investor Sentiment to Further Improve on Revenue Upside from Better Price/Volume Balance as iPhone Promotions Take Hold. The better revenue performance and outlook highlights the success of Apple’s trade-in program (4x as much trade-ins vs. a year ago) and financing programs, as well as pricing actions taken in certain emerging markets, including China and India. While the increase in our EPS estimates is led by an increase in our expectations for Services margins despite ramping on a group of new offerings launching later this year, we believe the key takeaway from yesterday’s announcement for investors, who have otherwise been concerned relative to price elasticity of demand for iPhones, is the success of the promotional initiatives and its longer term implications to both the iPhone shipment outlook and installed base growth. Overweight. Raises price target to $235 from $230. 

Michael Olson, Piper Jaffray: March Qtr Upside on Nearly All Metrics, Jun Rev Guide Above Ests. In addition to the company’s strong fundamental performance, Apple will be returning more cash to shareholders in the form of an increased dividend and $75B additional buyback authorization. Looking at the remainder of FY19, we expect limited excitement around this year’s iPhone launches, however, we believe that as long as services revenue continues to perform at or above expectations, this will tide investors over until anticipation for 5G iPhones begins to build, which is likely to start happening in 2H CY19. Overweight. Raises price target to $230 from $201.

Krish Sankar, Cowen: Services story at an inflection point. iPhone getting its groove back. Apple reported F2Q results and outlook that were modestly above. iPhone commentary on improving demand, especially in China, was a positive. Services revenues reached a new record with upcoming subscriptions expected to further the momentum. The new $75B repurchase program and dividend increase also underscore mgmt confidence in future growth. Outperform. Raises price target to $245 from $220. 

Walter Piecyk, BTIG: Increasing Apple Price Target to $234 On Return To Revenue Growth. Apple’s strategy in China appears to be working. This will enable investors to embrace the revenue growth and margin contribution of the services business without such a big negative overhang from the declining iPhone business. It will still take a few quarters for Apple to return to EPS growth, but the return to revenue growth next quarter (2 quarters earlier than expected) should help Apple’s stock sustain parity with the market P/E multiple of 17.5x. We are effectively re-rating Apple to that market multiple tonight. Buy. Raises price target to $234 from $220. 

Daniel Ives, Wedbush: Cook is the Comeback Kid; iPhone Demand Rebounding into June Quarter. With Cook and Cupertino facing hurricane-like headwinds in China, iPhone demand appears to have weathered the storm and is starting to “rise from the ashes” of the December debacle with a stronger growth trajectory now forecasted for the coming quarters and a healthy product cycle around the corner slated for September. With nearly every investor we spoke with and even the New York City cab driver uber-bearish on Apple shares starting in early January, shares are now up 30%+ from its lows defying the naysayers and in our opinion poised to make new highs over the coming months. Outperform. Raises price target to $235 from $225.

T. Michael Walkley, Canaccord: Ecosystem strong for increased services opportunities. We believe Apple’s ecosystem approach including an install base which now exceeds 1.4B devices globally is leading to record services revenue, and we expect the higher-margin services revenue growth to continue outpacing total company growth. Given the continued near-term soft sales trends for the latest lineup of iPhones, we forecast a 12% year-over-year unit decline in C’19 iPhone sales and anticipate 6% unit growth in C’20 based on an increasing installed base driving higher iPhone sales including those from the anticipated introduction of the 5G iPhone next fall. Buy. Raises price target to $245 from $230.

Aaron Rakers, Wells Fargo: Indications Of iPhone Bottoming; Forward Est. Relatively Unchanged. Apple reported that improved demand has been driven by: (1) Apple’s pricing actions and trade-in / financing programs, (2) China’s consumer stimulus efforts / reduction of VAT rates, and (3) improved U.S. / China trade dialogue. While Apple highlighted the success of its iPhone trade-in program, in part driven by its higher incentives, we think anticipation of a 5G iPhone in 2020 could impact upgrades. Market perform, $215.

Gene Munster, Loup Ventures: Apple Rebounds on Services and Non-iPhone. The $75B addition to the buyback was below our $100B expectation, and the 5% dividend increase was below our 16% expectation. Despite that fact, returning capital to investors still represents a lever that could move shares 28% higher over the next five years. This is based on returning $50B per year ($250B total) in cash from operations along with the outstanding $113B in net cash on the balance sheet on their way to “net cash neutral.” Assuming the stock goes up and, over the next five years, the weighted average market cap is $1.3T, the $363B in capital return would theoretically move shares 28% higher.

Andrew Uerkwitz, Oppenheimer: iPad Delivers a Surprise Return to Growth While iPhone Remains Muted. When answering questions regarding improvement in emerging markets, management mentioned that trade-in (regarded by consumers as subsidies) and installment payments worked very well. It seems clear that Apple has learned a lot about price elasticity in China, which makes us wonder how new iPhones will be priced in the fall versus a year ago. Perform. 

Ben Schachter, Macquarie: Neutral. Raises price target to $190 from $149.

Nehal Chokshi, Maxim: Hold. Raises price target to $217 from $195.

Ananda Baruah, Loop: Hold. Raises price target to $190 from $160.

Timothy O’Shea, Jefferies: Hold. Raises price target to $210 from $160.

Ben Thompson, Stratechery: Apple’s earnings. This week I have expressed concern about the extent to which Microsoft is increasing its monetization of its existing customers versus attracting new ones; it is fair to raise those same concerns about Apple. As I noted in Apple’s Middle Age, the company’s strategy is increasingly predicated on increasing its sales to its existing customers as opposed to finding new ones, and that certainly applies to most of these categories. Apple Services almost exclusively relies on iOS users, nearly all iPad buyers are iPhone users, etc. To put it another way, Apple’s long-term growth strategy is not finished if iPhone growth is finished, but it is, as currently constructed, capped in the long-term.

Neil Cybart: Above Avalon: iPhone Revenue Decline Has Bottomed. One of the more noteworthy takeaways from management’s call was that iPhone demand improved throughout 2Q19. March results were better than February results and February results were better than January results. Based on Apples strong 3Q19 revenue guidance, the implication is that this iPhone improvement continued into April.

Ben Bajarin, Creative Strategies: A few points on China. A point about the trade-in plans in particular, which was one thing Tim Cook said was doing specifically well in China. Chinese consumers have long sold their devices to the grey market in China and used that money to buy a new smartphone. This is already a normal behavior in China; it is just that most outsiders never saw it because of how hard it is to track the grey market. In fact, it was this grey market that led to a massive installed base of iPhones (>100 million) in China before Apple was ever officially partnered with a carrier there. The point I’m making is China was a market always poised for success for an Apple trade-in program, and I expect that to be overwhelmingly successful in China.

Bill Maurer, Seeking Alpha: Apple Earnings Keep Rally Going. On the bottom line, Apple beat estimates by a dime. This was partially due to the company’s large buyback in the period, $24 billion, which was a quarterly record for the firm. Half of this was an accelerated buyback, which did happen, as I thought. The bottom line beat also was helped by lower than expected operating income, higher other income items, and a lower than expected tax rate. These three items likely contributed half to two-thirds of the beat when compared to management’s original guidance.

D.M. Martins, Seeking Alpha: A Monstrous Comeback. Certainly, a double-digit revenue drop in the company’s main segment (accounting for 54% of total sales) is not necessarily a very positive sign. I believe Apple still has a lot of work to do to soften the blow of a product category that seems to be undergoing the mature-to-declining stages of its life cycle… But elsewhere, Apple seems to be doing a good job at executing on key growth initiatives, including those around Services and the Watch (in my opinion, a device that will emulate the early success of the iPhone over the next few years). 

See also: Look who raised their Apple price targets overnight

7 Comments

  1. Fred Stein said:
    Ives gets the prize piñata for purple prose, especially his, “New York City cab driver uber-bearish”. That recalls Joe Kennedy’s warning about getting stock tips from a person who shines shoes.

    Tim Cook used the word, learning.. we’re learning etc. He also mentioned significant increase in Daisy’s recycling. Might he see an increase in trade-ins and resale of used iPhones by Apple. While this would lower Apple’s iPhone ASP and margins, it would bring more owners of used iPhones into the Apple ecosystem*, especially into subscriptions. This strategy transfers margin dollars from device to services. It may hurt GM% a tiny amount initially and increase GM% long term.

    *On recent family celebrations, I’ve noticed several iPhone owners (older, as in my age) who use a tiny fraction of its Apps and services. Some don’t even use Maps, never downloaded Uber. From the Q2 report: 390M subscribers out of over 900M IB – room to grow.

    0
    May 1, 2019
    • David Emery said:
      I refuse to do business with Uber!

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      May 1, 2019
  2. Fred Stein said:
    Back again.

    Did I get this right? “390M paid service subscribers up 120M Y0Y”.

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    May 1, 2019
    • Jerry W Doyle said:
      @Fred Stein: Please excuse me if I am asking a naive question, but what terminology are you using to define a paid “subscriber?”

      Is a subscriber an Apple user who is a single entity subscribing to one service?

      If an Apple user subscribes to one or more services then does that Apple user become a multiple subscriber commensurate with his/her multiple subscriptions?

      Are we parsing a single subscriber as more than one IF they have multiple Apple IDs, as many most likely do, and subscribe to services? This would constitute one person as more than a single person.

      Would someone be so kind as to address the above questions for my (and perhaps) others’ personal edification?

      Thanks in advance…..

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      May 1, 2019
  3. Aaron Belich said:
    iPhone as the Ultimate Service within 5 years. The iPhone Upgrade Program, Daisy, and the trade-in Program are all indicators of this. Oh, as is iCloud and native security.

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    May 1, 2019
    • David Emery said:
      So, are you thinking that we’ll only ‘rent’ phones in the future? A couple of car companies are trying this model, but I haven’t heard much about whether it’s working for them.

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      May 2, 2019

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