Calling the recent weakness in Apple (AAPL) shares following Lumentum's (LITE) and Qorvo's (QRVO) negative pre-announcements this week a “buying opportunity,” Morgan Stanley analyst Katy Huberty told investors that she is still bullish on the iPhone maker’s Services growth. This comes a day after Guggenheim analyst Robert Cihra cut his rating for Apple to Neutral, saying he foresees iPhone units will decline 5% year-over-year in 2019.
APPLE SHARES ‘OVERREACT’ TO SUPPLY CHAIN REVISIONS: In a research note to investors, Morgan Stanley’s Huberty called the 8.5% decline in Apple shares following Lumentum's and Qorvo's negative pre-announcements this week a buying opportunity, noting that she is still bullish on the iPhone maker's Services growth. As the smartphone market matures, Services takes the “growth baton” from Devices, which ultimately results in more stable growth and higher margins at Apple, she contended. The analyst also noted that normalized Services revenue growth accelerated to 26% year over year in FY18 despite iPhone units down 6% in the two years leading up to FY18, which suggests unit sales and installed base growth and/or user engagement are not as tied as investors may think. While Huberty believes investors should focus on Services rather than iPhone units, she also thinks Apple's December quarter guidance incorporates the revisions made by Lumentum and Qorvo. Unit revisions are typically more severe for the supply chain than Apple given inventory fluctuations and the company's steps to ensure adequate supply early in a product launch, she added. The analyst reiterated an Overweight rating and $253 price target on Apple shares.
GUGGENHEIM MOVING TO SIDELINES ON APPLE: Yesterday, Guggenheim’s Cihra downgraded Apple to Neutral from Buy and removed his prior $245 price target on the shares. The analyst pointed out that the average selling price of the iPhone has increased a "dramatic" $220, or 40%, over the past 10 years, reflecting its "growing value to both consumer and business markets." However, nearly half of that increase came in fiscal 2018 alone, he highlighted, adding that this makes a "period of digestion now likely." Cihra believes Apple's growth via average selling price is now "widely known," and thinks the iPhone's nearly 60% contribution to revenue and profits is "looking like a headwind again." Following early supply chain cuts, exemplified by Corning's (GLW) "softer" fourth quarter gorilla glass guidance back in October and this week's warnings from 3D sensing laser supplier Lumentum and LCD supplier Japan Display, the analyst now estimates iPhone units will decline 5% year-over-year in fiscal 2019.
SUPPLY CHAIN UNDER PRESSURE: Earlier this week, shares of supplier Lumentum were under pressure after the company cut its outlook. While Lumentum did not call out Apple by name, its mention of a request from one of its "largest Industrial and Consumer customers for laser diodes for 3D sensing" to "materially reduce shipments" is widely believed to be referring to the iPhone maker. On Tuesday, a supplier of components for smartphones also cut its near-term forecast, citing an unnamed customer believed to be Apple. Qorvo lowered its revenue and earnings forecasts for the third quarter of fiscal 2019 due to recent demand changes for "flagship smartphones." Meanwhile, another supplier of Apple, AMS AG, lowered its fourth quarter revenue estimates to $480M-$520M from $570M-$620M, citing recent demand changes from a major consumer customer.
PRICE ACTION: In morning trading, shares of Apple have gained over 1% to $188.75.
