Apple defies China slowdown fears with strong iPhone sales

28 Oct 2015 | Author: | No comments yet »

Apple doesn’t want you weighing things with your iPhone just yet.

This long-time bear, who has repeatedly growled about overly optimistic expectations for iPhone 6 sales, upgraded the tech titan to Overweight from Sector Weight, arguing that “long-term value offsets remaining near-term risk.” Expectations for the 6s cycle have fallen and we see March as the low point for growth.

Many analysts are cheering Apple’s latest quarterly report, with Pacific Crest’s team upgrading their rating for the iPhone maker’s stock to overweight, and BTIG arguing the stock is cheap.In an interesting post on Medium, developer Ryan McLeod explains how he and his friends built a digital scale app for the new iPhones by taking advantage of Apple’s new pressure sensitivity feature, 3D Touch.

With Cook & Co. forecasting year-over-year iPhone unit growth off Herculean comps in the December quarter with China remaining white hot, we believe last night was a major step in turning the positive tide around the Apple AAPL 1.72% story. The company only uses 3D Touch for a few functions — adjusting how quickly you scrub through music and video, for example, or quickly accessing app shortcuts from the home screen — but McLeod says he was inspired by all the “creative workarounds” on the App Store to hijack it for something else. Chief Executive Officer Tim Cook attributed the forecast to customers upgrading to the latest iPhone models, converts switching over from Android handsets and continued growth in China.

While there will continue to be worries around FY16 growth during this 6s product cycle as the “iPhone 6 hangover” thesis remains a lingering cloud over Cupertino’s head, we believe this quarter and guidance proves yet again how much fuel is left in the iPhone engine. We see Apple as a sustained share gainer in that market with pricing that is likely to remain protected by Apple’s brand, ecosystem and the extraordinary utility of the iPhone. Their “overweight” rating is akin to a “buy” rating. (MarketWatch would like to suggest that it might be too soon to declare that the smartphone is “the most important consumer product ever.” What about paper? Then there was the problem of getting the screen to recognize touch input.”We needed an object that was conductive, had finger-like capacitance, formed a single finger-like touch point, was a household item, and could hold items to be weighed,” writes McLeod. Late yesterday, Apple posted fiscal Q4 EPS and revenue that easily beat the Street’s expectations, but forecast revenue for this quarter slightly below estimates.

CEO Cook said you wouldn’t know there was an economic slowdown based on Apple’s results,” the UBS team said. “Apple is converting 30% of its revenue into free cash flow, generating $70 billion of free cash flow annually,” said Walter Piecyk in a note late Tuesday. “This implies an 11% FCF yield relative to its $650 billion market cap. That is simply too high of a yield given its market position, expectation of growth and high margins, regardless of the much lower level of revenue growth and EPS expectations for 2016 detailed above.” The stock has found a bottom after the past summer’s market slide, notes analyst David Fuller of Fuller Treacy Money, an investment strategy service.

Users could balance objects on the spoon and get, well, not a completely accurate reading (and nothing heavier than the maximum weight of 385 grams), but something that was far better than no scale at all. The stock “remains well above its climactic low on 24th August but has slightly lagged behind the Nasdaq indices since that new floor was established at $92,” he said in emailed comments early Wednesday. Over the past week, the commentary from U.S. operators about declining phone upgrade rates was starting to concern us, but apparently China continues to chug along unabated, with mainland units growing 120% during the quarter.

It could be that Apple is worried that people will break their screens if they use them as scales (although this wouldn’t explain the availability of joke apps) or that it thinks such an app would be used for weighing drugs (a possibility, although most drug dealers would probably prefer a $20 digital scale that’s actually accurate). As we learn more about phone upgrade programs, we agree with management’s assessment that the benefit might actually be larger in future years than what they are seeing now. The other answer is that Apple simply doesn’t know what it thinks about digital scale apps yet and so is defaulting to “no.” The idea is popular, though.

December quarter guidance implies iPhone unit and revenue growth on the back of 1) strength in emerging markets, including China, 2) continued upgrade cycle, with 69% of users yet to upgrade to larger screens, 3) record Android share gains, and 4) ASP uplift. While tough Y/Y iPhone compares still could make for an air pocket or two in 1H C2016, we are modestly lifting our growth estimates due to 1) sturdy ASPs, 2) accelerating converts, 3) potential of shortening replacement cycles with the advent of upgrade programs, and 4) more favorable mix due to increasing effects of services. We think there are several tailwinds that should benefit AAPL across both revenues and EPS – 1) ~1/3 of the install base has migrated to the 6 product line, 2) Android switch rate at 30% suggests further gains likely, 3) tailwinds in China from LTE expansion and further uptake of AAPL products, 4) ASP’s should sustainably ramp higher given memory uptake and 5) gross-margins could see upside given leverage and cycle efficiency. Maynard Um, Wells Fargo: The Good. 1) iPhone sales of $32.2B exceed our $31.6B (Street $31.4B) on stronger ASPs of $670 (our/Street: $645/$649), 2) iPhone channel inventory was below target range, which should help the Dec/Mar quarters, 3) iPad channel inventory also fell below target range, 4) Gross margin of 39.9% was above our/Street’s 39.7%/39.3%, 5) Watch units increased sequentially, 6) FQ4 EPS of $1.96 was above our/Street’s $1.95/$1.88, 7) implied F16 EPS of $3.08-$3.29 vs. our $3.15 and Street’s $3.22. Revenues were slightly ahead while EPS benefited from better margins. iPhone shipments were inline with estimates of 48mm but ASP of $670 was significantly higher.

Although the company continues to perform well, we think stock performance remains tied to iPhone shipments, which face tough compares over the next couple of quarters making it difficult for the stock to work.

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