
Could Apple Sell Fewer iPhone 7s Than Expected?
Editor's Note: This article was originally published on Real Money at 11:52 a.m. on July 25.
Apple (AAPL) - Get Report is still a buy ahead of the release of the company's quarterly earnings results after the closing bell on Tuesday, according to UBS analyst Steven Milunovich. However, buying interest in the company's upcoming iPhone 7 is expected to be the lowest for the device since 2008.
Milunovich made the call based on 451 Research's June smartphone survey of 4,168 North American consumers. The consumer research firm's checks showed that only 8% of smartphone buyers were "very likely" to purchase the phone, while 17% were "somewhat likely." Those results were in line with the 8% and 16% that were "very likely" and "somewhat likely" to purchase the iPhone 6s last year.
"Samsung (SSNLF) has gained momentum while Apple has held steady. The weakness likely extends globally. Channel checks from the UBS China telecom team have indicated further slowdown in handset sales in the June quarter and relatively weak 4G subscriber additions. Also, AT&T (T) - Get Report said its second-quarter overall subscriber upgrade rate [was] 4.6% vs 5.8% a year ago," Milunovich wrote.
The negative sentiment surrounding Action Alerts PLUS holding Apple has been palpable for months, as the company continues to navigate its way through the low side of its iPhone cycle.
In the past, Apple has tended to release its truly groundbreaking iPhones in alternate years, with place-holder iPhones sandwiched in between the major releases.
In fact, Action Alerts PLUS co-manager Jack Mohr expects CEO Tim Cook to temper sales expectations during the company's upcoming earnings call.
"Cook has proven to be a prudent CEO, and the prudent thing right now would be for Apple to lower sales expectations, rather than let the market set expectations, leaving the company to explain later why they missed expectations," Mohr said in an interview Monday.
Mohr still sees the iPhone 7 as a bridge to the release of the iPhone 8.
"We remain in Apple for the long-term and view the iPhone 7 as a catalyst, with the iPhone 8 providing another level of boost. We remain excited about the Services business, and believe that its long-term value is underappreciated by the market. We reiterate our long-term $130 price target, but we recognize the near-term pressures that will weigh on the stock for the time being," wrote Jim Cramer and Mohr in a recent note.
Meanwhile, UBS still has a $115 price target on Apple, suggesting a 16.5% upside from the stock's opening price Monday.
"We now expect iPhone unit growth of about 2% in F17 with upgrade growth offsetting a decline in new users. Strong sales in F15 stole from F16, but upgrades should hit in F18. Earnings only get back to the F15 level in our model, so new products may be required to excite investors beyond a trade," Milunovich said. "Apple has both annuity and hardware hits aspects, but we think the best way to understand the company is as a platform deserving of valuation between legacy computer stocks and pure software platforms like Google (GOOGL) - Get Report ."
Three months of speculation and negative sentiment are sure to come to a head following the company's earnings release Tuesday.
Whichever way the previous quarter's financial results go, many investors will be looking ahead to Apple's guidance for the anticipated September quarter release of the iPhone 7. That guidance could dictate which way the stock goes until the first official iPhone sales numbers are released.
As for UBS, it sees Apple recovering from this trough in the iPhone cycle.
"Our DCF (discounted cash flow) analysis implies downside risk only if iPhone declines greater than 5% to 10% per year. We believe iPhone sales will stabilize in F17, and grow 15% in F18 on a strong upgrade cycle, justifying a higher multiple," UBS analysts wrote.









