Quick Thoughts: AAPL – Winter is Coming
- AAPL’s 3QFY17 was stronger than expected on iPad and Mac upside, and the stock has surged on 4Q guidance that assuages concerns of delays in new iPhone models
- The specs of the anticipated iPhone X have been widely leaked. This model will test high end price elasticity ($1000+) and will likely ship later and in limited quantities. Is it “cool” enough?
- The 7S and 7S+ will offer incremental improvement in the same form factors and price points as the previous models. Will they stimulate enough upgrades to meet investor expectations?
- If AAPL beats for FY18, it will be due to a strong iPhone upgrade cycle. Expectations for further growth in FY19 appear unrealistic in that case. If AAPL misses for FY18 …
Like the Lannisters and their debts, Apple always executes well. 3QFY17 was reminder of that. After a few years of sliding iPad sales, Tim Cook and company pivoted to a more enterprise oriented stance for the tablets and stanched the bleeding – unit sales were up a strong 15%, perhaps owing in part to an ASP decline that held revenue growth to 2%. Mac sales had an opposite pattern – unit sales up just 1% but revenues up 7%, strong performance in a dismal PC market. Services, which is largely composed of Apple’s 30% take on app and content sales through its App Store, continue to hum along with 22% growth. Other products, which includes the Watch and AirPods, was up 23%, but remains less than 5% of total sales. The big kahuna – the iPhone – delivered a 3% sales increase YoY, surprising on unit sales but seeing an unexpected QoQ drop in ASP. All of it translated into a clear top-line and bottom-line beat for Apple. None of that matters very much.
A 3Q17 beat is nice, but that didn’t send the stock up 6% after hours. More importantly, management released 4Q17 guidance that was roughly in line with consensus, easing concerns that supply chain issues might delay the delivery of the new iPhones past September. Coincidently, this week also brought a flood of leaks from Apple supply chain partners largely confirming specs for the super-premium 10th anniversary iPhone – AKA the iPhone 8 or iPhone X (the name has been more tightly managed than the design details). In addition to the wrap-around OLED screen (which, frankly, is a bit of a me-too relative to Samsung), the new model will have facial recognition for automatic unlocking and may be able to discern expressions as well. This is pretty cool, although the utility may be modest, since you will still need a fingerprint for ApplePay. The rest of the upgrades are a bit mundane – a better camera, wireless charging, better 3D touch, etc. This is the aspirational model, expected to be priced well north of $1,000, produced in limited numbers, and hitting the market in October or later.
If Apple is to meet the street’s iPhone volume expectations, it will have to be the 7S and 7S Plus that will get them there. Here there will be no wall-to-wall curved screens, although flat OLED is a possibility, IF the suppliers were able to meet unit shipment commitments. OLED will look a bit sharper, but it would hardly make the new model a MUST have upgrade. Apple has been rumored to have worked on a specialized graphics/AI chip – this could make it into all the new models this year. If so, it might be tied to the ARKit API introduced at the WWDC and enable 3rd party augmented reality Apps to run smoothly. Apple might have an internally developed App to launch with the phones to highlight the feature. This could generate some upgrade fever if the initial AR apps are compelling. The other rumored improvements are unexciting – marginal improvements to an already terrific camera, better 3D touch, wireless charging, etc.
The Wall Street consensus is bullish on demand for the new iPhones – brokers are projecting 15%+ unit growth for FY18. With the premium market nearly saturated, and severe pressures for Apple in China (where the ubiquity of WeChat has obliterated the iPhone’s switching barriers), this scenario is counting on a massive super-cycle of upgrades from the installed base of users, a three-year echo of the huge sales for the iPhone6. This is possible, although the new capabilities in the new phones do not seem as compelling as the first big screen formats introduced with the iPhone6.
Still, the aftermath of the iPhone6 was ugly – sales dropped double digits YoY and the stock fell 30% from its March 2015 relative high. If the brokers are right, and the super-cycle hits, how long before investors look past the initial rush to the inevitable downturn. If the brokers are wrong, and the super-cycle disappoints, the cold-water shock could come sooner. Holding onto Apple ahead of the massively hyped 10th Anniversary iPhone has been a great call, but as we move toward the September announcement and the fevered rush to assess the first day, first weekend, first week, etc. sales, we advise investors to have an itchy trigger finger. Winter is coming.
©2017, SSR LLC, 225 High Ridge Road, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.