|Apple’s iPhone X Ain’t a Blockbuster…And That’s OK |
Dec. 7, 2017 11:08 a.m. ET
Shares of Apple ( AAPL) have outpaced the market this year, even though sales of its new iPhones may not have been as robust as some had hoped. And that's OK, says Keybanc Capital Markets' Andy Hargreaves and his team.
Illustration: Photographer: Michael Nagle/Bloomberg
Hargreaves reiterated an Outperform rating and $192 price target on the stock today. He writes that some investors have been disappointed by lack of enthusiasm for the iPhone X--Data from Google ( GOOGL) shows that consumers are searching for the product at about the same rates that they searched for the iPhone 6s, below other launches--but in fact this is just a byproduct of a mature, high-end smartphone market.
And while there may not be meaningful upside for this reason, investors can still be optimistic when it comes to Apple's margins:
We do not expect upside to consensus iPhone unit estimates in FY18. Our estimate for 237M iPhone units in FY18 is largely in line with the consensus estimate of 240M iPhone units in FY18, and likely requires above-average upgrade rates and a relatively strong share-gain cycle. While this appears achievable, indications of market maturity suggest it is not sustainable for multiple years, which we believe makes gross margin critical.
Gross margin upside will be critical, and seems likely. Despite our slightly dour view of iPhone units, we continue to believe the combination of increased iPhone prices and growing services revenue will drive upside to consensus gross margin estimates in FY18. This should drive upside to consensus EPS expectations, even if iPhone units are only in line. Others see iPhones gaining traction in China, while patient investors will be rewarded when the super-cycle finally arrives.
Apple is 0.3% to $169.60 in recent trading.