National Post (National Edition)
IPHONE 8 OPTIMISM BOOSTS APPLE SHARES.
The market was impressed with Apple Inc.’s first quarter results for fiscal 2017, sending the stock up more than six per cent on Wednesday, as both revenue and earnings beat analysts’ estimates, and weak second quarter guidance appeared to be overshadowed by the much-anticipated iPhone 8.
In spite of a challenging environment for consumers, Apple sold a record 78.3 million iPhones in the holiday quarter. The five per cent year-over-year sales increase demonstrates that customers weren’t put off by Apple’s decision to remove the analog headphone jack from its latest devices.
“With strength across virtually all products and geographies, bears will have a tough time finding much to highlight,” said Ben Schachter, an analyst at Macquarie Capital Markets. “Most importantly for the stock, iPhone units exceeded expectations even without being able to meet demand for the 7 Plus.”
Apple also reported a better-than-expected average sale price of US$695 for the popular smartphone, and analysts attributed the strength in this metric to a higher proportion of sales for the more expensive iPhone 7 Plus.
“Given the Galaxy Note 7 issues and strong demand for the iPhone 7 Plus models, we believe Apple will continue extending its leading market share of the premium tier smartphone market installed base,” Canaccord Genuity analyst T. Michael Walkley said in a report.
He expects to see doubledigit growth in the iPhone user base, which positions the company for strong sales and earnings growth as the iPhone 8 upgrade cycle ramps up later this year.
While there is plenty of debate about what investors should pay for another iPhone “super cycle,” Cowan and Co. analyst Timothy Arcuri noted that at approximately 13.5x forward earnings, “it is hard to argue the stock is egregiously expensive,” particularly given Apple’s five-year average P/E of roughly 12.5x.
Arcuri pointed out that the S&P500 is also more expensive than in recent years, so on a relative basis, Apple’s discount of about 24 per cent to the index is pretty much the norm.
“Apple reported a strong quarter and a weak guide, but the market is looking right through it, in our opinion, to the much anticipated iPhone 8 cycle,” J.P. Morgan analyst Rod Hall told clients, raising his price target on Apple shares to US$142 from US$114.
“At this point, we give up on pointing out the consumer risk and join the iPhone 8 party,” he added.
Hall highlighted Apple’s indication that it had channel inventory of 1.2 million iPhones in Q1, but that remained at the low end of its five to seven-week target range.
The analyst believes that positions Apple very well heading into the weaker part of the year in terms of demand, and he expects to see further inventory burn ahead of a potential iPhone 8 announcement at the Worldwide Developers Conference, expected to be held in June.
Investors should also be pleased to hear that despite strength in the December quarter, Apple didn’t achieve optimal channel inventory exiting the period.
Amit Daryanani at RBC Capital Markets told clients that should provide more confidence in the company’s Q2 guidance.
The analyst also noted that demand in China was stronger than expected, as core China sales rose six per cent year-over-year, and more than 50 per cent of iPhone sales were to first time iOS buyers or switchers.
“We think the print enables us to see a path toward greater than US$10 EPS power through the iPhone 8 cycle, when Apple will benefit from an attractive iPhone product and a growing (and aging) install base of 700 million-plus iPhone users,” Daryanani said in a research note.
Acknowledging that Apple’s guidance for the March quarter was less impressive than its results for the three months ending Dec. 31, 2016, BMO Capital Markets analyst Tim Long told clients that sentiment will likely depend more on potential tax reforms and the assumed iPhone refresh in September.
While management doesn’t usually provide guidance for iPhone sales, Long is forecasting 52 million units in Q2, which compares to a consensus estimate of 53 million.
“We expect focus will be on assumptions for the September iPhone refresh, rather than near-term units,” the analyst told clients.
As many investors continue to focus on the iPhone, Apple is innovating and putting more resources into its Services business.
Gene Munster, managing partner at Loup Ventures, considers the iPhone 7 Plus the most powerful driver for Apple to establish a lead in bringing augmented reality to the masses.
“In other words, the iPhone 7 Plus shows us how Apple will transition from a mobile-first company to a company with a strong position in an AR-centric world,” he said in a report.
Munster expects AR-capable wearable devices to eliminate the need for smartphones sometime in the next decade, and that will make Apple’s Services revenue much more important.
“For now, most wearables are dependent on a smartphone, so these devices will help sustain iPhone sales and drive wearable sales for Apple,” he said.