KeyBanc analyst Andy Hargreaves lowered his Apple iPhone estimates for fiscal year 2020 as his supply chain feedback suggests stable near-term demand, but a likelihood of ongoing softness ahead. Further, the analyst argued that the Services narrative lacks meaningful positive catalysts. His peer at Loop Capital also argued that Wall Street consensus is too high regarding iPhone revenue expectations for the back half of the year on both a units and capacity per unit basis.
ONGOING SOFTNESS IN 2020: KeyBanc's Hargreaves told investors in a research note that his supply chain checks suggest near-term Apple iPhone demand has stabilized, but suggest little optimism around a recovery in fiscal year 2020 due in part to relatively modest hardware updates, stagnant global demand, and the potential for ongoing impairment to demand in China. The analyst lowered his estimate of fiscal year 2020 iPhone unit growth to 2%-plus from 5%-plus and slightly reduced his 2020 iPhone average selling price estimate to $731 from $738. This drives his fiscal year 2020 revenue and earnings per share estimates to $263B and $12.61, respectively, from $268B and $12.85.
The analyst also believes many core services will continue decelerating and sees growing regulatory risk around App Store revenue sharing policies. A positive surprise from new services in video, gaming, news, and credit could drive investor sentiment around the Services segment higher, but seems unlikely based on competition in those markets and Apple's relative lack of competitive advantages compared to services that are more closely tied to the iPhone, he contended. Hargreaves reiterates a Sector Weight rating on Apple shares as he sees little to improve the Services narrative over the next year and anticipates ongoing weakness in iPhone, which he believes continues to generate over 50% of Apple’s gross profit.
IPHONE DEMAND CONSENSUS TOO HIGH: On Monday, Loop Capital analyst Ananda Baruah told investors in a research note of his own that while Apple’s iPhone unit demand is tracking in line with consensus for the current quarter, he believes that the Street is too high regarding revenue expectations for the back half of the year on both a units and capacity per unit basis. Moreover, he continues to believe that risk remains to iPhone revenue through the year, but with a stabilizing China in the March quarter. Reiterating a Hold rating and a $190 price target on the stock, the analyst further stated that Apple shares have "settled in" around his target, with the stock also benefiting from the "rotational safe haven" and increasing yield-driven investment interest.
PRICE ACTION: In morning trading, shares of Apple have gained about 1% to $195.60.