It was a tough intro to the new year for Apple (AAPL) stock as the company needed to re-adjust expectations for investors – pre-announcing a negative outlook for the December quarter results. The company guides for revenues of $84 billion ($7 billion less than the prior guide), gross margins at 38% (previously 38.5%) and an implied EPS of $4.15 (the Street estimated $4.66). The slowdown is almost single-handedly due to a weak economy in China, one of Apple’s biggest markets. As a result, investors hit the panic button, sending shares tumbling nearly 8% in Thursday’s trading session.
On a positive note, the services business accelerated to 28% year-over-year with growth of $10.8 billion and the install base grew in the December quarter. Wearables grew by 50% year over year.
RBC Capital’s analyst Amit Daryanani believes the risk/reward in AAPL is attractive at this point, reiterating an Outperform rating on the stock but cutting the price target to $185 from $220 in light of the news. (To watch Daryanani’s track record, click here)
“While this is clearly disappointing, investors were bracing for a disappointing print/outlook for AAPL. The stock, we think, is getting closer to trough valuation support trading at sub 10x FTM P/E (ex cash position) post our lowered estimates,” Daryanani explains.
Daryanani estimates the March quarter revenue to be $60 billion with an EPS of $2.59 whereas the Street expected $64 billion in revenue and $2.95 for EPS. For fiscal year 2019, RBC estimates revenue of $260 billion with an EPS of $11.87 versus Street predictions of $278 billion and $13.24 in EPS.
Where’s The Bottom? Daryanani suggests: “We are modeling AAPL’s EPS to be ~$12 in FY19. Historically, the stock troughed around early-2013 period at ~9-10x P/E that would imply the support would be closer to $120. Though we would note AAPL did not have a strong capital allocation program at that point, which should provide a better valuation support. Assuming 10x is the support this time around (ex-cash) it would peg the support for the stock at $140. Conversely on the upside we could revert back to a multiple inline with the markets that would take the stock towards closer to $210.”
Analysts are weighing in, many of them pushing out reports soon after the news was released. TipRanks analytics has been keeping a catalog, finding that Wall Street is split about the stock. Out of 33 analysts, 17 are bullish and 16 are sidelined. The consensus price target of $210.45 shows an upside potential of 33%. (See AAPL’s price targets and analyst ratings on TipRanks)