Apple (AAPL -2%) is weighing on equity indices this morning after analysts at Rosenblatt downgraded the stock to Sell from Neutral while maintaining their $150 price target on the stock.
Rosenblatt sees more risk than reward at play after the stock's recent rebound. The firm sees "fundamental deterioration" over the next 6-12 months. They believe iPhone sales will be disappointing while sales growth will slow for the iPad, HomePod, AirPods, and iWatch and even for services.
Apple is pushing the investment thesis for a shift to higher margin services, but the iPhone remains the company's bread and butter in terms of revenue and profits.
Apple is expected to unveil its latest family of iPhones in September. Expectations for the next iPhone cycle are quite low as the recent trend of incremental updates to the iPhone is expected to continue. The iPhone to be released in the fall of 2020 is expected to be the first that is compatible with 5G cellular networks.
As a result, iPhone sales over the next year could disappoint. Incremental iPhone upgrades combined with high price tags have caused the replacement cycle to elongate.
Apple has been focused on increasing iPhone ASPs to drive revenue growth as units actually fall yr/yr in a saturated and competitive smartphone market. Higher prices have seemingly exacerbated the lengthening of replacement cycle. Trade tensions with China add to risk.
While iPhone sales remain a risk, the stock has largely brushed off these concerns since the company gave better-than-feared guidance for the second fiscal quarter in January. In April, second quarter iPhone and service revenue was in-line with estimates while the company actually guided third quarter revenue above estimates. Worldwide iPhone revenue fell 17% yr/yr during the second quarter, but iPad revenue grew 22%, service revenue grew 16%, and Wearables, Home and Accessories sales grew 30%. Apple also increased its dividend by 5% and added $75 bln to its share repurchase program.
This morning, Wedbush was incrementally more positive on iPhone demand following channel checks. Meanwhile, Needham added the stock to its Conviction Buy List this morning.
Rosenblatt's $150 price target is the lowest among 39 Wall Street analysts. Analysts are largely positive on the biggest publicly traded company in the world. The median price target is $212.
Apple will report fiscal third quarter results on the afternoon of Tuesday, July 30. Earnings are expected to fall 10% yr/yr with revenue down slightly. Looking further ahead, fiscal fourth quarter EPS is expected to fall 7% with revenue down 3%. Earnings for fiscal 2019 are expected to fall 4% yr/yr with revenue down 3%. Wall Street currently expects earnings to grow 11% with revenue up 4% in fiscal 2020. Rosenblatt may have a point in that those estimates may prove aggressive in the face of another soft iPhone cycle.
With a ~$920 bln market cap, the stock trades at ~17.5x fiscal 2019 earnings estimates, roughly in-line with the S&P 500's earnings multiple. Apple's multiple is closer to 15x, excluding cash and liquid securities.
Apple stock has displayed some resilience despite the weak iPhone cycle. Investors appear to be finding solace in the fact that the installed base of Apple devices continues to hit new highs while the stock's valuation is reasonable to attractive.