According to a research note from Pacific Crest's Andy Hargreaves published last week (via Barron's), Apple's (NASDAQ:AAPL) upcoming product cycle could wind up being better than the analyst had feared. In particular, Hargreaves notes that "a meaningful decline in F2016 iPhone unit sales had been" his team's "largest concern."

However, Pacific Crest's "initial estimates of iPhone component orders in FQ4" lead the firm to believe that Apple is "anticipating demand in the next iPhone cycle that is ahead of [Pacific Crest's] current expectations.

As a result, Hargreaves believes that the risk to Apple's shares is reduced.

No "rush" this time around, though
Pacific Crest's fear that iPhone unit sales could actually decline in the coming fiscal year was driven by the fact that the analysts don't expect the same "rush of upgrade and switching activity" during the iPhone 6s cycle as investors saw when Apple launched the iPhone 6/6 Plus.

As investors are no doubt aware, with the iPhone 6, Apple satisfied the pent-up demand among iPhone fans for larger smartphones that don't quite enter into "phablet" territory. At the same time, it used the iPhone 6 Plus to gain "phablet" share, as there was pent-up demand for extra-large iPhones as well.

With the upcoming iPhone 6s/6s Plus, Apple will no doubt deliver superior devices relative to today's iPhone 6/6 Plus. But from a year-over-year perspective, the next iPhone has to go up against the extremely successful iPhone 6/6 Plus.

That said, if you're a long-term investor in Apple, you may be betting that the company will deliver a compelling enough set of features and functionality to grow demand, even in the face of very difficult year-over-year compares.

Some good news: iPhone demand staying strong
In the same note, Hargreaves points out that iPhone demand continues to be strong, with checks at suppliers indicating "the potential for Apple to sell 50 million to 52 million iPhones in FQ3" against Hargreaves' estimate of 46.8 million units.

The analyst says that this could boost earnings per share for the quarter by $0.20 atop of his current estimate of $1.86 (which, Hargreaves notes, is "already $0.10 ahead of the Street estimate of $1.76").

Apple Watch demand also strong, but caution warranted
Hargreaves also touches upon the Apple Watch. He claims that initial demand was been "very strong" and that Apple "remains well positioned to produce enough units to meet or exceed" his unit shipment estimate for Apple's third fiscal quarter of 5.5 million as well as his full-year estimate of 11 million.

That said, he notes that the reviews of the Apple Watch "have been mixed," and that customer interest in the device, as measured by search volume, trails even the lowly iPod.


Hargreaves points out that in order for Apple to meet "current expectations" for Apple Watch shipments during the company's fiscal year 2016, a "dramatic increase in functionality is likely needed." He acknowledges that the developer community could help improve the appeal of the Apple Watch, but ultimately concedes that the risk to his firm's fiscal 2016 Apple Watch unit shipment estimate of 24 million "is increasing."

I would argue, though, that there is a potential silver lining here. A far-from-perfect first generation product means that as Apple introduces new iterations of the Apple Watch with increased functionality, more customers might be tempted to hop on board. Additionally, buyers of the original Apple Watch might -- after potentially feeling a bit bummed that their expensive device now seems so outdated -- upgrade.

The bottom line? iPhone beats Watch
When all is said and done, although Hargreaves sees "growing risk around Apple Watch," and although he claims that Apple "remains behind in many key services areas," he seems confident that the profit from Apple's iPhone business will keep cash flow robust and buybacks strong. All told, he thinks these factors are "likely to limit downside" to Apple's shares. 

Unsurprisingly, Hargreaves has a neutral "Sector Weight" rating on the stock, which seems about in-line with the views he expressed in his note.