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Apple
is expected to announce the next generation of iPhones just three months from now, and investors are feeling a little jittery.
Last year, there was huge investor buzz about the debut of the iPhone 12 lineup, the company’s first 5G-capable models. And demand has been robust: iPhone revenues in the March quarter were $47.9 billion, up 65.5%.
But there’s not much buzz about this year’s update, which is viewed by some investors an interim step—what
Morgan Stanley
analyst Katy Huberty describes as an “s-cycle,” a reference to previous half-step updates like the 4S, 5S, 6S, and XS. (The consensus seems to be that the new phones will be called iPhone 13, although Apple hasn’t said anything about the next phones yet.)
“Investors are concerned about Apple’s fiscal 2022 growth prospects, given the expectation for an iPhone s-cycle and waning cyclical work from home tailwinds,” she writes in a research note Thursday. “We’re not as concerned and see a good long-term buying opportunity.”
She notes that some investors fear a double-digit iPhone revenue decline lies ahead, as was the case for the iPhone 6S in fiscal 2016 and the XS in fiscal 2019.
Huberty adds that she’s getting fewer investor calls on Apple (ticker: AAPL) than anytime over the past five years. She thinks there are four factors contributing to reduced interest in the stock.
One, she notes that we are in a seasonally low period in the iPhone cycle, elevating “the impact of supply chain noise.” Two, she notes that Apple is increasingly being scrutinized by regulators, and that regulatory risk is likely to remain an overhang for the stock. Three, she says there are worries that work-from-home-related demand for Macs and iPads will ebb, giving the company increasingly difficult earnings comparisons. And four, investors are worried about the s-cycle issue—they fear that a new round of iPhones with only incremental improvements will lead to a longer replacement cycle and negative estimate revisions.
Huberty expects that June-quarter results will be better than the Street fears, driven by strong iPhone, Mac, and iPad demand, and that the uptick that started during the pandemic will be durable. But she concedes that fears that revenue could be down double digits in fiscal 2022 won’t be disproved in the June quarter. Huberty still thinks Apple can generate revenue growth in the low teens through fiscal 2023, with EPS growth in the high teens.
She keeps her Overweight rating and inches up her target price to $162 from $161. Apple stock was up 0.1%, at $133.81, in recent trading. The
S&P 500
was up 0.6%.
Write to Eric J. Savitz at eric.savitz@barrons.com
