All Eyes on Apple Inc. FQ1:18 Earnings Tonight

Apple just got a downgrade right before its big quarterly earnings show- but one analyst actually calls for upside potential tonight.

Is Apple Inc. (NASDAQ:AAPL) about to confront a snag in its momentum? One analyst is so concerned about negative buzz circling iPhone X order cuts that he is abdicating the bullish camp and scaling back his expectations. Yet, another analyst may be sidelined on the tech titan, but believes upside is ready to be served.

Let’s take a closer look at expectations ahead of tonight’s highly anticipated first fiscal quarter earnings of 2018:

BMO analyst Tim Long is frowning, fearing that the titan is “hitting a plateau-” one that has sent the analyst running away from the bulls.

In an apprehensive quarterly preview, the analyst downgrades from an Outperform to a Market Perform rating on AAPL stock while cutting the price target from $199 to $162, which implies a 3% downside from current levels. (To watch Long’s track record, click here)

To go from upside expectations to downside means Long takes all the recent press on iPhone X cuts incredibly seriously, as he warns: “We believe a weaker mix in Q1 will push estimates lower for March and beyond. We are more concerned by a secular change for iPhone. Following 10 years where ASPs have generally moved higher, we believe prices will plateau as with the rest of the industry. We also expect no growth year/year in the China market, a reversal from last quarter’s 12% growth.”

Look for “Near-term softness” from the big Apple, writes Long, who predicts: “We believe March quarter guidance will be well below current consensus. We are lowering units to 55 million, and ASP falls on lower iPhone X mix. We carry these trends out in the model, and also improve the capital return program given the recent tax changes.”

As such, the analyst is taking his full-year fiscal 2018 EPS forecast from $11.34 to $10.46 and his 2019 EPS projection from $12.27 to $11.92.

Though Long commends Apple’s well-executed efforts to drive ASPs up even as other industry competitors have been falling flat, he notes prices likely will not exceed the roughly 30% of iPhones priced at $900+ for 2018- especially when just 12% of smartphones in the world are sold for more than $600.

Regarding the China factor, Long remembers last quarter, when sentiment was at a high for a recovery for the tech titan, with revenues climbing 12% on the heels of six consecutive quarters where the numbers slipped to double-digit dips. December does not bode well for Apple from where the analyst is standing, as Long bets units will sink 9% year-over-year.

“What’s next?” asks Long. The analyst answers without much enthusiasm for the long-term, contending: “We still view the iPhone base as growing, and the devices are on average getting older. However, without a compelling product cycle in September, we may see a slow upgrade cycle once again. The recent stock reaction reminds us of early 2016, but later that year many investors started looking towards OLED and the 10-year anniversary phone, which drove the stock higher. No such product is on the horizon now.”

Mizuho analyst Abhey Lamba likewise approaches from the sidelines, but is more positive than Long, setting expectations for a beat.

Yet, finding upside potential “priced in” to the stock’s valuation, the analyst reiterates a Neutral rating on AAPL stock with a price target of $175, which implies a 4% upside from current levels. (To watch Lamba’s track record, click here)

Ahead of the print, the analyst calls for between $89 and $91 billion in total revenue from the titan, more confident than consensus of $88 billion. What makes even a neutral analyst upbeat on revenue prospects? The chance for upside from iPhone average selling prices (ASP). Gross margins have good odds to land at the mid-range of the guide between 38.0% to 38.5%, by Lamba’s calculation. Considering revenue upside, the analyst wagers EPS could hit at roughly $3.95 to $4.05, which would be a meaningful beat over the Street’s $3.85.

In fact, from where Lamba is standing the Street’s short-term iPhone ASP expectations come across as “very conservative.” The analyst angles for a 2% to 4% year-over-year rise, which would translate to iPhone units between 80 to 81 million, and an ASP rising 12% to 14%, reaching $780 to $790. In comparison, consensus bets on 80 million units from Apple and an ASP of merely $756.

“Based on our checks: 1) iPhone X supply/demand balance occurred around late-December; 2) our Japan research team (led by Yasuo Nakane) sees a steeper than normal procurement decline into MarQ on the back of some softness in X demand,” explains Lamba.

In terms of the second fiscal quarter guide for 2018, the analyst notes: “We expect better ASPs to benefit F2Q18 also; total revenue outlook could print inline with consensus of $65bn. We note that there have been further order cuts in the supply chain since we published our detailed preview and think that our initial expectations for March outlook were higher than consensus, which seems to have moved lower in the last couple of weeks. Assuming in-line gross margins and ongoing cost execution, implied EPS could come in-line consensus as well. While we acknowledge potential upside from cash repatriation and tax reform, we think it is largely baked into the stock at current levels.”

Overall, “We continue to see healthy upgrade activity within the installed base which, along with better services contribution, should help the company perform,” Lamba concludes on a positive note, mainly acknowledging the cost of current levels as the chief reason he is hedging his bets.

TipRanks recognizes some caution in analyst sentiment making its way through the Street, but mostly, the optimists win out. Based on 30 analysts polled in the last 3 months, 20 are bullish on the tech titan empire with 10 remaining on the sidelines. With a return potential of nearly 16%, the stock’s consensus target price stands at $193.35.

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