Top Analyst Predicts: Apple (AAPL) Will Guide Down Tomorrow Night on Weaker iPhone Expectations

BMO's Tim Long notes that high consumer satisfaction means longer replacement cycles for AAPL- which bodes less impressively for iPhone numbers.

Apple Inc. (NASDAQ:AAPL) investors anxiously wait to see just how dismal iPhone second fiscal quarter numbers will hit tomorrow evening against the Street after negative rumors have been on a rampage. Top analyst Tim Long at BMO is more cautious, dialing down his iPhone expectations ahead of the print, expecting that the big AAPL machine is geared up to guide down for the third fiscal quarter on iPhone weakness.

Spotlighting risks longer-term confronting the tech leader, the analyst reiterates a Market Perform rating on AAPL stock with a $166 price target, which implies a slight close to 1% upside from current levels.

“We believe price elasticity and lengthening smartphone replacement cycles are mostly to blame, and we do not expect the issue to be solved by the next cycle. We also update our capital return assumptions, as we believe Apple will announce a new shareholder return program to get to zero net cash,” explains Long, who notes that new models set a new cost that averaged $100 ahead of 2017’s new models.

In reaction, the analyst is cutting his fiscal 2018 EPS forecast from $11.16 to $10.55 and his fiscal 2019 EPS estimate from $12.74 to $12.00. Moreover, the analyst is lowering his fiscal 2018 unit projection from 220 to 209 million and his fiscal 2019 unit forecast from 223 million to 214 million.

Though consumer satisfaction is usually a positive, this means iPhone users are holding tight to smartphones for more periods, which is extending the replacement cycle, wagers the analyst. Even if Apple still leads its rivals in replacements, look out for these rates to take an even sharper downturn: “Although we estimate iPhones get replaced more frequently than competitors’ phones, we believe replacement rates will continue to worsen.”

For the third fiscal quarter, the analyst believes Apple will bring in $47.7 billion in revenue, a far cry from the Street’s $51.9 billion. Long continues, “Our estimate calls for revenue growth to slow to mid-single digits vs. low double digits in our prior assumptions. We expect continued strength in Services, up 17% y/y in June, and mixed performance in iPads and Macs.”

In a nutshell, Long surmises: “recent supply chain data points point to even worse performance than we had anticipated. We are also updating our capital return assumptions ahead of an expected announcement of a new shareholder return program alongside earnings,” anticipating the big AAPL machine could hit zero net cash by the close of fiscal 2020; and predicting the company will return double the free cash flow in fiscal 2019 on back of 50% yearly dividend raises coupled with tripled buybacks.

“While the lower units are not a surprise given the abundance of negative supply chain data points, we are more concerned about the long-term trends. We believe the replacement rate is extending for iPhones, and this could lead to a few years of stagnant unit shipments.

Tim Long has a very good TipRanks score with a 68% success rate and a high ranking of #116 out of 4,775 analysts. Long realizes 20.5% in his annual returns. Investors who follow Long’s recommendation on AAPL will earn an average of 32.7% in profits on the stock.

TipRanks showcases AAPL mostly has bulls in its corner on the Street. Out of 29 analysts polled in the last 3 months, 17 are bullish on the tech titan while 12 hedge their bets on the sidelines. With a healthy return potential of nearly 17%, the stock’s consensus target price stands at $192.52.

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