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Here's Why This Analyst Just Slashed His Apple Inc. Stock Price Target

By Ashraf Eassa – Mar 7, 2016 at 8:00PM

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iPhone sales continue to be "soft."

Apple's latest iPhones haven't been enough to spur growth. Image source: Apple. 

Per Barron's, Pacific Crest analyst Andy Hargreaves reiterated an "overweight" rating on shares of Apple (AAPL -1.79%) stock. However, the analyst took his price target down from $132 per share to just $127. This target reduction comes as the analyst dims his revenue and profit expectations for the current fiscal year.

Let's take a closer look at why he's bringing those estimates down and to what they're being brought to.

Soft iPhone demand
Hargreaves reportedly took his iPhone unit shipment estimates for the current quarter down from 49 million units to just 47.5 million units. This reduction drove the analyst to reduce his revenue estimate for the current quarter from $51.3 billion (which was already slightly below the midpoint of the $50 to $53 billion range that Apple guided to) to just $50 billion.

Can iPhone 7 save the day?
The analyst reportedly goes on to argue that his team sees "no evidence of iPhone customers leaving the platform at greater levels" -- the implication here seemingly being that weak iPhone demand isn't necessarily due to market segment share loss.

Hargreaves claims that if this dynamic continues, his team "continue[s] to believe [that] normal replacement dynamics will drive mid-teens iPhone unit growth in the iPhone 7 cycle."

Generally speaking, Apple is expected to see iPhone shipments for the current fiscal year of somewhere between 200 million units and 215 million units -- anywhere from a 7% decline to a roughly 13% decline year over year.

If we assume that Apple comes in at around 210 million units and if we assume 15% growth off of that base, we're looking at around 241.5 million units in fiscal 2017, which would be an all-time record for iPhone sales.

One thing that'll be interesting to see is how average selling prices for iPhone fare in fiscal 2017. Apple is expected to introduce a "super premium" iPhone Pro in the coming product cycle, which could help to boost average selling prices. As a potential headwind to average selling prices, Apple is expected to put out a new 4-inch iPhone SE and significantly reduce iPhone 5s prices.

Even if Apple returns iPhone to growth in FY2017, can it repeat it in FY2018?
It's interesting, but not all that surprising, that the iPhone 6s/6s Plus cycle has proven to be something of a bust for the iDevice maker. It was silly to try to follow up what was surely a blockbuster, record-smashing iPhone (and CEO Tim Cook seemed to know that they would be so ahead of time) with phones that looked practically the same with minimal improvements to the camera and display.

Indeed, Apple seems to have bet this product cycle on 3D Touch, and from the tepid demand for iPhones, it doesn't look like that bet was a winning one.

At any rate, even if the iPhone 7 returns the iPhone business to unit/revenue growth, Apple is going to need to make sure that the follow-on "s" cycle brings compelling enough improvements to keep the momentum going. For Apple's sake, the company should examine very carefully why the iPhone 6s cycle has been a bust and what it can do to avoid a repeat of it in future product cycles.


Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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