Apple said it sold 45.5 million iPhones in the fourth quarter, down 5.2% from 48 million iPhones last year. This was the third consecutive quarter of year-over-year declines in iPhone sales.
But this isn't the time to panic.
First, because of the timing of the release of the iPhone 7, Apple had only nine days of iPhone 7 sales in the fourth quarter. So the vast majority of revenue came from iPhone 6 and 6 Plus, which probably experienced a slowdown in sales as we came close to the iPhone 7 launch date.
Second, CEO Tim Cook mentioned the company has been supply-constrained, which probably suppressed sales for those nine days.
Third, the first quarter has an extra week in it, which should boost sales about 7% to 8%.
Fourth, last year, the company had 3.3 million units in channel inventory. This year they won't have that many phones in transit (an estimated 500,000), which means the company will be able to recognize revenue on more units.
Fifth, Apple could add over a million new users who are switching over from the Samsung (SSNLF) Note 7, which has been recalled and discontinued because of an exploding battery. A recent press release from research firm Wave7 said of the 45 carrier stores it surveyed, 10% to 30% of Samsung 7 users were switching to iPhones. AT&T (T) - Get AT&T Inc. Report and Sprint (S) - Get SentinelOne, Inc. Class A Report are running free iPhone 7 promotions with the signing of a contract.
And finally, the iPhone 7 has a slightly higher price ($20 on average) and a somewhat better margin profile (44%), which will boost revenue even if total units disappoint.
Apple is a holding in Jim Cramer's Action Alerts PLUS portfolio. Cramer and Research Director Jack Mohr wrote to subscribers on Tuesday that the "bottom line" is that "iPhone sales beat estimates."
Cramer and Mohr commented, "We reiterate our view that Apple is a stock to own, not trade, and we believe the strong investment thesis is validated in this quarter." They added that investors should watch Apple's services business closely.
Analysts are modeling 76 million units for the December quarter and revenue of $74.7 billion. But, if you add in all the factors above, Apple could probably sell something closer to 80 million phones. If they were able to do that, the company would have sold 211 million phone in 2016 or even 220 million, which would be a low-to-mid single-digit growth rate (4% to 6%).
Add it all up and that means there is upside to the consensus estimates. Analysts think the company can report fiscal 2017 revenue of $225 billion and earn $8.97 per share. But if I'm right, analysts will spend the year raising estimates.
If Apple can beat the estimate of 76 million iPhones, the company will probably post revenue closer to $250 billion and earnings of $9.75 per share.
So at $118, the stock is trading at just 12 times estimates, which means the shares can easily go past the 52-week high of $125. In my opinion, Apple is headed higher.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.