Is It Time to Get Over Weak Apple (AAPL) iPhone Volume Fears? Top Analyst Weighs In

RBC's Amit Daryanani chimes in ready for the focus of AAPL's narrative to shift away from iPhone demand fears over to massive potential in capital allocation and Services.


Apple Inc. (NASDAQ:AAPL) got hit with mounting fears of weakening smartphone sales after the biggest contract chipmaker in the globe and key AAPL supplier TSMC unleashed a discouraging full-year revenue guide. Before, TSMC had called for 10% to 15% in growth and has since scaled back the guide to roughly 10%, underperforming Street-wide expectations. The Taiwan-based semiconductor player called out challenges of smartphone and crypto demand softness, leaving AAPL investors in a bit of a scramble with shares slipping almost 3% yesterday. What does this spell out for iPhone demand?

Top analyst Amit Daryanani at RBC Capital can’t help wondering, “should we be getting past soft iPhone volumes” already? After all, “soft iPhone volume expectations are now largely baked in AAPL stock price,” continues the analyst, who is unbothered with TSMC’s reduced outlook.

With Services looking “attractive” with quicker gains, the analyst notes the AAPL team intends to boost this business up to roughly $48 to $50 billion by 2020, and currently generates over $30 billion in revenues. Services gross margins already stand meaningfully ahead of the corporate average. Meanwhile, growth here mostly flies separate from device cycles and boasts a lengthy runway. This segment very well could cultivate an improved valuation story for the tech titan, wagers the analyst.  Moreover, the company’s sturdy free cash flow coupled with a net cash balance of $163 billion can translate to a substantial rise in capital allocation in the upcoming quarter.

Overall, “We think TSMC’s outlook to a certain extent confirms our view that AAPL may work to curtail its iPhone channel inventory aggressively ahead of the fall 2018 product launches, especially as we think AAPL will launch all its devices this September (vs. doing a staggered launch). We note, based on our past channel checks with suppliers, that current production expectation for new iPhones is ~80-90M units for second half calendar 2018, which is below suppliers’ expectation of ~100-120M units for iPhone 8/X in early 2017. Given the softer outlook on volumes, we think ASPs become increasingly more important and AAPL should see double digit increase this cycle but it would be challenging to achieve that in the next cycle. We think muted iPhone units are now well understood on the Street and baked into the stock price. The focus on AAPL, going forward, should shifts primarily to capital allocation and Services. We think AAPL has the potential to positively surprise on both fronts,” writes Daryanani.

Therefore, the analyst reiterates an Outperform rating on AAPL stock with a $203 price target, which implies a close to 18% upside from current levels.

Amit Daryanani has a very good TipRanks score with an 83% success rate and a high ranking of #14 out of 4,788 analysts. Daryanani earns 27.6% in his annual returns. When recommending AAPL, Daryanani yields 28.7% in average profits on the stock.

TipRanks indicates largely positivity as the sentiment on the Street when it comes to the big AAPL machine. Out of 29 analysts polled in the last 3 months, 17 are bullish on AAPL stock while 12 remain sidelined. With a return potential of nearly 12%, the stock’s consensus target price stands at $192.89.

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