While some investors "will fret around price cuts" and what it means for top-line growth in the next few quarters, Wedbush analyst Daniel Ives believes Apple (AAPL) is facing a "code red" situation in China and will need to "aggressively" cut prices on the iPhone XR. Further, the analyst argued that there "needs to be serious contemplation" around significant content acquisitions to drive services growth over the coming years. Also commenting on potential M&A targets, Barron's said over the weekend that Nintendo (NTDOY) could be the best fit for the iPhone maker.
PRICE CUTS IN CHINA, CONTENT M&A: Stating that "Apple's pricing hubris on iPhone XR was the major factor in the company's December earnings debacle," Wedbush's Ives told investors that be believes the tech giant needs to "aggressively" cut prices in China on the XR and pull forward what he estimates is roughly 15M-20M iPhones that would otherwise sit idle waiting for the next release, or worst case, move to lower priced competition. This price cut strategy has already started based on data points out of China over the last week, he contended, which is a "major positive first step in moving out from the dark days of the December quarter." Additionally, with services the linchpin of the Apple story moving forward, Ives believes "there needs to be serious contemplation within Cupertino" around significant content acquisitions to drive services over the coming years. While he believes a standalone subscription video content service from Apple is on the horizon for the next year, the company is "playing from behind the eight ball" in this content arms race with Netflix (NFLX), Amazon (AMZN), Disney (DIS), Hulu, and AT&T(T)/Time Warner all going after this next consumer frontier. Ives told investors that he sees A24, Lionsgate (LGF.A; LGF.B) and Sony Pictures (SNE) among the highest probability M&A targets, Viacom (VIA;VIAB)/CBS(CBS) and MGM Studios among the medium probability M&A targets, and Netflix, Disney, and Gaming platform/video game publishers among the low probability M&A targets. The analyst reiterated an Outperform rating and $200 price target on Apple shares.
APPLE SHOULD BUY NINTENDO: With Apple shares down nearly a third in the past three months and the financial guidance bombshell earlier this year, the "burning question" turns to what the company can do to spark a turnaround, Tae Kim wrote in this week's edition of Barron's. Apple has hinted that it will act boldly to revive its fortunes, and while flashy takeover candidates like Netflix and Tesla (TSLA) often get mentioned, their elevated valuations and cash burn do not match Apple's love for a high profit margins and financial conservatism, the publication noted. Barron's pointed out that the best fit for the iPhone maker may be Nintendo, as both companies have similar attributes like mountains of cash, gushing profits, beloved brands, loyal customers, and sticky ecosystems of software and services. With Nintendo, Apple would get significant exposure to the large and growing gaming industry, while benefiting from a vast array of potential revenue synergies, Kim added.
WHAT'S NOTABLE: Apple chip supplier Dialog Semiconductor (DLGNF) reported on Monday early revenue results that came in at the low end of the expected range. The chipmaker reported unaudited revenue of $431M for the fourth quarter of 2018, with its previously guidance at $430M-$470M. Late last year, several Apple suppliers, including Qorvo (QRVO) and Lumentum (LITE), cut quarterly revenue guidance on reduced orders from a major client, believed to be the iPhone maker.
PRICE ACTION: In morning trading, shares of Apple have dropped about 1.4% to $150.21.