A closely watched Apple analyst on Wednesday highlighted some potential noise surrounding the iPhone maker’s upcoming December quarter, underscoring why we routinely warn against trading in and out the stock. Shares of Apple (AAPL) have not been spared in this year’s tech rout. However, while down roughly 24% in 2022, the company still has a market value of about $2.15 trillion. In a note to clients, Bernstein analyst Toni Sacconaghi discussed two main reasons why he believes Wall Street’s consensus estimates for Apple are too high — and, as a result, why he thinks they could be revised lower in the future. Reason No. 1 The first is Apple’s announcement over the weekend, in which the tech giant said it was lowering production of the iPhone 14 Pro and iPhone 14 Pro Max due to Covid restrictions at a key assembly plant in China. Even though it continues to see “strong demand” for the high-end phones, Apple now expects fewer shipments than it “previously anticipated and customers will experience longer wait times to receive their new products,” according to Sunday’s press release . Sacconaghi expressed some issues with Apple’s press release, arguing it was “vague in not defining the period in which Apple expects lower shipments — i.e., just the December quarter, or the full year.” “Moreover, the fact that the release occurred so early in the quarter (when ostensibly Apple could make up for lost production days) begs the question of whether demand for iPhone or other products inflected negatively, or whether Apple felt that consensus estimates for FY Q1 were simply too high,” wrote the analyst, who has a neutral rating on Apple shares and a $170-per-share price target. Reason No. 2 The second concern Sacconaghi flagged goes beyond trying to decipher a three-paragraph press release. Instead, the analyst dug into the impact that Apple’s abnormal calendar for fiscal 2023 has on the Street’s financial models. Apple’s first quarter is 14 weeks long this year and ends Dec. 31, instead of its traditional 13 weeks. The analyst thinks this could lead revenue being assigned to the first quarter that, normally, would be recorded in Apple’s second quarter. This may result in some revenue estimates for Q2 being too high. “Our analysis suggests that consensus has not incorporated an extra week in its forecasts, given that it is modeling normal historical revenue distribution throughout FY 23 [fiscal year 2023] — i.e., it forecasts that AAPL will generate 31% of its annual revenue in the December quarter, which is nearly exactly inline with its historical average (31.1%),” Sacconaghi wrote. He believes that’s potentially wrong because the extra week in the first quarter is between Christmas Day and New Year’s Day, “which is typically a strong week for Apple sales.” He continued, “If sales in the quarter are back-end loaded because of production delays, the week could be a notably strong one for Apple.” However, the analyst acknowledges there’s another possible scenario — that the production delays could be significant enough to push a large chunk of sales into January. This means they would then be tallied as revenue in Apple’s fiscal second quarter, which typically is weaker than Q1 because the first quarter benefits from holiday sales. “While it is possible that delays in production could smooth out seasonality in Q1 and Q2, we still believe that 2H FY 23 [second half of fiscal year 2023] and FY 23 estimates are too high,” Sacconaghi wrote. The Club’s take We continue to believe Apple is a stock to own, not trade. For that reason, we maintain a big-picture view that emphasizes long-term trends around its competitive moat, brand loyalty and free cash flow generation. This context is important in understanding how we think through Sacconaghi’s note and this moment for Apple, more generally. We’re not recommending investors step in and buy Apple shares here, recognizing the macro environment is complicating the valuations for large-cap tech stocks. This is part of the reason why we lowered our price target on Apple shares last week despite its better-than-expected fiscal fourth quarter , also referred to as the September quarter. Apple shares on Wednesday are trading at roughly 22 times forward earnings, above their five-year average of 21.4, according to FactSet. Considering all the risks, such as inflation-wary consumers and the strong U.S. dollar, we think Apple’s valuation is too rich to step in and start buying shares. At the same time, we’re not recommending investors get out of the stock right now and then try to get back in at a lower point. It’s too difficult to time the market like that. Instead, Apple shareholders should be patient, especially as we go through a period where there’s a lot of noise surrounding the stock. For example, we’re faced with a steady drumbeat of questions about demand for the iPhone 14, specially whether it will hold up for higher-end Pro and Pro Max models. In Wednesday’s note, Sacconaghi suggests an undertone of demand softening could be at play with the aforementioned iPhone production cuts. We take a different view. While it’s a constantly evolving situation, we believe that for now demand continues to outweigh supply for the premium, higher-margin iPhone 14 models. Morgan Stanley echoed that stance in a note to clients Tuesday. As for the extra week in Apple’s first quarter, we’re not getting too hung up on it due to our extended horizon. It’s not something to completely ignore — it’s helpful to recognize that some of the estimates could be revised as the Street gets more visibility on the direct impact of the unusual fiscal calendar. That process might spark negative headlines and daily chatter around the company. But at the same time, it does not alter our thesis and, if anything, strengths our conviction in believing Apple is a name to own for the long term, not a name to make quarter-by-quarter trades around. When you take a long-term investment view, you’re able to process things like an extra week in a quarter with a different perspective than short-term thinkers. (Jim Cramer’s Charitable Trust is long AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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Apple CEO Tim Cook speaks onstage during day 2 of Vox Media’s 2022 Code Conference in Beverly Hills, California.
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A closely watched Apple analyst on Wednesday highlighted some potential noise surrounding the iPhone maker’s upcoming December quarter, underscoring why we routinely warn against trading in and out the stock. Shares of Apple (AAPL) have not been spared in this year’s tech rout. However, while down roughly 24% in 2022, the company still has a market value of about $2.15 trillion.
