Apple Inc. (NASDAQ:AAPL) will release its FQ1 earnings report next week, and the chasm that exists between the bulls and bears appears to be growing as mixed data points about iPhone X sales continue to pile up. One perma-bull trimmed her price target for Apple stock this week, citing the growing clamor around iPhone X weakness leading up to the next earnings release. However, today another firm is trying to shift the story away from all that negative iPhone X-related noise and toward something most can agree to be optimistic on: Apple services.
Macquarie analyst Benjamin Schachter highlighted Apple services in a note to investors this morning. Choosing to ignore the iPhone X noise, he reminded investors that the services business was his focus when he initiated coverage of Apple stock in 2014. He noted that Apple services have now become a “well-accepted AAPL growth driver,” adding that it has outperformed the “non-consensus bullish view” he had of the segment at the time of his initiation.
He feels that investors are still underestimating the impact Apple services will have on the company’s growth in the coming years, even though the company itself has called out the segment as a key source of growth. He’s expecting hardware revenues to be flat after the iPhone X launch, but he expects the high-margin Apple services business to drive a 13% compound annual growth rate, along with capital returns.
He noted that non-game apps are now a larger percentage of App Store sales, and he expects this shift to continue. He also expects Apple services to contribute “a significant percentage” of the company’s profit growth going forward, possibly even more than 80%.
In his note this morning, GBH Insights analyst Daniel Ives said that checks of Apple’s supply chain in Asia have pushed Wall Street into “full panic mode.” He noted that the Street is more focused on the March quarter because of the growing number of data points suggesting that iPhone X sales will be weak. However, he continues to believe that the FQ1 earnings release will be strong and even expects iPhone units to come out ahead of consensus.
Ives is looking for 81 million to 82 million iPhone units in next week’s Apple earnings release, while the Street is expecting only 79 million units. He also expects upside in the iPhone average selling price, resulting in “robust” upside for FQ1. Typically, Apple earnings releases include guidance for the net quarter, and the Street seems to expect a miss there. The consensus for iPhone units stands at around 61 million, although a few analysts, such as Toni Sacconaghi, Jr. of Bernstein, warned recently that Apple may only sell 51 million to 57 million units.
However, despite all the bearish views Ives feels that the bull story for Apple stock is “well intact” for this year.
“It’s time to take a deep breath as despite soft demand spots from the flagship iPhone X coming out of China and the U.S. over the last month, the monster product cycle thesis out of Cupertino is delayed/elongated rather than gone in our opinion,” he wrote.
Morgan Stanley analyst Katy Huberty trimmed her price target for Apple stock from $205 to $200 in a note on Thursday, although she still is expecting Apple’s March quarter to be better than the Street is expecting.
Ives argued that there should be about 350 million iPhones “in the window of opportunity” for upgrading in the next year or year and a half. As a result, he feels that the question becomes which model at which price point ends up attracting all those upgrades.
He still expects this year to bring three new iPhone models this year, including 5.8-inch and 6.5-inch models with OLED displays and a third model with an LCD screen. He also expects Apple to stagger this year’s iPhone releases over the next six or nine months in order to capture upgraders who skipped the iPhone 8/8 Plus/ X cycle.
Ives maintains his Highly Attractive rating and $205 price target for Apple stock.