Longbow Has a Point About Apple Inc Stock and Here’s Why It Matters

Advertisement

AAPL stock - Longbow Has a Point About Apple Inc Stock and Here’s Why It Matters

Source: Flickr

It’s a rarely seen headline, but Apple Inc. (NASDAQ:AAPL) was downgraded on Wednesday on concerns that the latest iterations of the iPhone weren’t exactly flying off store shelves. Specifically, Longbow Research analyst Shawn Harrison downgraded AAPL stock from “Buy” to “Neutral,” explaining, “We now forecast only a good, not great iPhone cycle.”

It’s a call that induced snickers and eye-rolling, ironically posted on the same day Bank of America Merrill Lynch reiterated its bullishness on AAPL and upped its price target from $180 to $220 per share.

The thing is, Harrison may have a valid point — not so much about the iPhone X and the iPhone 8, but the iPhone franchise in general. It’s increasingly less about that specific piece of hardware, and more about everything else Apple does.

No More iPhone Euphoria?

For the record, Longbow’s Apple analyst went on to say, “Our checks now point to mid- to high-single-digit fiscal 2018 iPhone shipment growth vs. consensus of 11% growth.” And, whatever business Apple doesn’t win with the new iPhones it will more than make up with other revenue-bearing opportunities — most notably, its services business, which sells digital goods like video, music and apps.

Bank of America analyst Wamsi Mohan doesn’t have the same iPhone concern — or at least he didn’t voice them in his updated thoughts on AAPL stock. Indeed, he may be seeing a tamer acceptance of the iPhone now as a good thing, commenting. “We remain bullish on potential for cash repatriation, lower tax rates, and the potential for positive estimate revisions heading into 2019. A smoother iPhone cycle (no boom-bust) should drive increased stability in earnings, commanding a higher multiple.”

Is a “smoother iPhone cycle” a polite way for Mohan to concede Harrison is right?

The boom-bust cycle has been a challenge in the past, more so for investors than the company itself. Most investors innately know that it’s increasingly difficult for the company to top revenue created by a prior year’s release of a new iPhone, as saturation and competition concerns materialize. So far though, Apple has plowed through it.

What if, however, Harrison’s observation of tepid interest in the iPhone 8 and the iPhone X tacitly mark the beginning of iPhone euphoria.

What If…

Yes, the iPhone is still the king of the smartphones, particularly in the United States where iPhones alone made up 39% of the smartphone market last year, versus only a 32% share for all the smarthpones made by rival Samsung Electronics Co Ltd (OTCMKTS:SSNLF). In China, Morgan Stanley analyst Katy Huberty believes the iPhone X and iPhone 8 are once again leading to market share gains in that all-important market.

And, yes, even if the iPhone isn’t what it once was, Apple is on a roll with its services arm. This unit saw revenue growth of 34% in the fiscal fourth quarter of 2017, which ended in September. It’s still going strong too, with Apple only recently getting serious about this particular opportunity.

What if, however, the stock’s price was ultimately driven by the iPhone sales growth, regardless of the company’s overall performance? It wouldn’t be the first time investors have focuses on a single metric and ignored the bigger picture.

Go back and read the rest of Harrison’s thoughts on the matter. He made a point of saying, “Although there are now expanded drivers to AAPL’s business, the iPhone continues to wag the dog. Given our change in estimated iPhone growth profile near term, we anticipate this dynamic will limit upside stock appreciation.”

In those terms, the argument changes dramatically.

That stance also underscores what B of A’s Mohan didn’t say. All of his new bullishness was rooted in tax-rate-driven margins and liquidity. None of it was about the iPhone’s progress. He even noted that iPhone’s boom-bust cycle was slowing down, which — for better or worse — isn’t what owners of AAPL stock are accustomed to. Tax savings don’t exactly keep bullish fires lit indefinitely.

A deeper look at what Morgan Stanley analyst Katy Huberty said takes on a different meaning too, when one realizes one of the key tenets of her message was that the iPhone X was outpacing the adoption of the iPhone 8, largely driven by upgrades from existing iPhone owners. That, in and of itself, isn’t a huge net win for Apple in China. It’s just displacement, even if it drives fresh revenue. After shelling out $1,000 or more for the iPhone X, it’s difficult to imagine owners will be quick to plug into the next upgrade as quickly as they have in the past.

Bottom Line on AAPL Stock

The end of the world? No. It’s not even a good reason to shed your Apple stock, if that’s what you’re reading into the message.

On the other hand, don’t underestimate how important bullish iPhone headlines have been and still are to AAPL stock.

The average investor and especially the average Apple shareholder has long touted the iPhone’s rapid growth as a reason to own the stock. If those headlines aren’t as thrilling in the foreseeable future (and even the iPhone’s consensus growth rate of 11% this year isn’t exactly stellar) as they’ve been in the past, it may well be as troublesome for the stock’s price as Harrison fears it will be.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/longbow-point-apple-inc-heres-matters/.

©2024 InvestorPlace Media, LLC