Despite placing Apple (AAPL) on Morgan Stanley’s “Best Idea” list less than two months ago, analyst Katy Huberty lowered her price target for Apple stock Sunday night to $143 from $162. In the wake of the news, Apple stock price fell nearly 3% on Monday before recovering to end the day down 0.6%.
The reason behind the revised target price for Apple stock is a new survey the firm conducted showing a year-over-year decline in iPhone sales this quarter. With the iPhone accounting for 66% of net sales in 2015, that points to serious concerns about continued revenue growth.
However, if you have a long enough time horizon, there’s not too much cause for concern.
iPhone Sales Might Decline for the First Time Ever
When the iPhone 6s was released, Huberty’s survey estimated that iPhone sales would climb 6.8% in fiscal 2016. That same survey now shows sales declining 5.7%, including a 0.6% year-over-year decline this quarter.
The estimates follow a survey of businesses in AAPL’s supply chain showing a decline in order volume. Morgan Stanley analyst Jasmine Lu lowered her component order estimates by 10% this quarter and 20% next quarter. It turns out Apple either overestimated iPhone demand or frontloaded supply.
The latter scenario provides a much rosier outlook for Apple stock investors, and it’s entirely plausible. Anticipating the largest iPhone launch ever, Apple likely quickly ramped up its supply chain to meet the expected demand. AAPL sold 13 million iPhone 6s units in its first weekend, more than last year’s 10 million unit launch of the iPhone 6.
Apple may also be clearing capacity for the rumored 4-inch iPhone that several analysts believe will launch during the first half of next year. Analysts expect a 4-inch iPhone model would mostly supplement existing iPhone sales with just a small bit of cannibalization. If Apple does indeed launch a 4-inch iPhone, Apple stock investors should see revenue continue climbing in 2016.
Long-Term Apple Stock Investors Should Stay the Course
Over the long term, there are a lot of factors benefiting Apple stock investors and iPhone sales. The new installment plan Apple introduced with the launch of the iPhone 6s should drive higher unit sales over the long term as the plans increase loyalty to the iPhone brand.
What’s more, the iPhone install base continues to expand rapidly compared to other smartphone manufacturers, leading to the halo effect on all of Apple’s other products.
On a conference call following her price target revision, Huberty told investors that this isn’t a repeat of 2012/2013 when Apple stock price was cut nearly in half over a seven-month period. She noted that the brand is strong, customers are loyal, gross margins are stable, and AAPL is investing heavily in R&D. Meanwhile, revenue streams from Apple Watch and Apple TV along with growth in iTunes could help offset any declines in iPhone revenue.
The iPhone isn’t going anywhere, but after last year’s blowout sales — 231 million units — Apple faces some tough comparables. The continued success in China may help it stay ahead of itself next quarter, and a smaller iPhone could provide a nice boost to get the company through the second half of the year. But even if iPhone sales do fall slightly, AAPL is churning out cash from its existing sales and sales of other products.
And with Apple stock trading at value prices, it doesn’t need to grow too much to justify its price.
As of this writing, Adam Levy was long AAPL.