Analyst: Despite Recent-Quarter Weakness, Apple’s Future Far from Rotten
Apple (NASDAQ:AAPL) shares extended their post-earnings tumble on Wednesday, dropping more than 6% in afternoon trade as investors punished the stock following results that showed a fiscal second-quarter stumble.
The company revealed a miss on both the top and bottom lines, posting its first year-over-year revenue decline in 13 years after the bell Tuesday. The tech titan also issued a disappointing revenue outlook for the current quarter, and said it expects revenue to come in between $41 billion and $43 billion, well below the Thomson Reuters estimate for $47.32 billion.
The quarterly figures, combined with steep declines across its hardware sales, sent the stock plunging, and shaved off $42.8 billion from the company’s market cap, the biggest decline since January 2013, according to data from Dow Jones.
S&P Global Market Intelligence equity analyst Angelo Zino maintained his 12-month price target of $130 on the stock and said with the sudden downward pressure on price, he sees a compelling risk-and-reward opportunity for investors.
Still, he said the latest figures from the company are a “perfect storm of bad news” it now has to deal with.
“Overall, when you look at the total smartphone space right now, it’s just not growing. As a result, I think we have to start looking at Apple a little bit differently, and as more of a cyclical-oriented company than one that’s going to see this robust growth on a year-over-year basis,” he said on FOX Business Network’s Mornings with Maria.
During the quarter, Apple said it sold 51.9 million iPhones, but that was a 16% drop from the same period a year ago. Similarly, iPads saw a 19% drop, while Mac sales declined 12%.
In a note, analysts at Credit Suisse, which hold an outperform rating on the stock with a price target of $150, said they see a subdued iPhone cycle for the “next few quarters,” but see recovery on the horizon.
“We believe the iPhone business will recover in [2017] given installed base growth, high retention rates, and a normalization in replacement rates. Specifically, we believe installed base growth, which has grown 80% since 2013, should drive unit growth beginning with the iPhone 7,” the note said.
While hardware sales suffered during the last three months, both Credit Suisse and S&P Global Market Intelligence analysts see services as the next growth opportunity for Apple. That division was a strongpoint from the company’s perspective as well.
In a statement alongside Apple’s results, CEO Tim Cook praised his team for performing “extremely well” as the company faced macroeconomic headwinds including a slowdown in global growth and a strong dollar, and said revenue from services continued to strengthen for its more than one-billion active devices.
Credit Suisse analysts said they see great potential for this segment of the company and pointed to revenue growth from devices in consumers’ hands running the Apple IOS, App Store growth and Apple Music revenues.
For the growth to continue, Zino said Apple needs to deploy some of its more than $230 billion cash hoard to take more product-development risks.
“They’ve returned over $160 billion to investors. Think about what they could have purchased over that time. It could have been a Tesla, could have been a Netflix, could have been both,” he said. “They need to start taking some risks if they want to become a growth company.”
Long term, he said the connected car could be an opportunity for Apple, but more penetration in the living room should also become a focus.
“We think TV streaming eventually becomes a real opportunity and eventually maybe hardware-oriented devices within the living room. But it remains to be seen when that eventually happens,” he said.
Until then, Zino warned not to expect any surprises with the next product launch, which is anticipated to bring the iPhone 7 in September.
“This is going to be more evolutionary than anything,” he explained. “The thing here is that there are so many customers who have held onto their devices for so long, we think just the next generation [iPhone] launch will be enough to at least help the company grow.”