With Apple's (AAPL) - Get Report next quarterly earnings report due out on Tuesday, July 30, two prominent analysts have shared divergent views on their outlook for both of Apple's main business segments.
Apple shares were rising 1.8% to $206.20 a share on Monday late morning.
Optimism From Morgan Stanley
"Favorable setup into the quarter with low risk of September guidance miss," Morgan Stanley's Katy Huberty, who has an outperform rating on Apple, summarized in a note in which she raised her price target to $247 from $231. She sees iPhone sales recovering in the China region and services revenue resuming its acceleration.
"We expect June quarter Services revenue growth to accelerate (by ~3 points, normalized) for the first time since the March 2018 quarter, a key catalyst for regaining investor confidence in the Services narrative and multiple re-rating," she said. Meanwhile, Huberty sees evidence Services revenue will grow at 19.5% year-over-year, following growth of 16.8% in the second quarter. She has the Services business valued at 19.5 times her forward one-year earnings projection.
As for the iPhone, "June quarter iPhone data held up in our checks, with China showing an improvement from the March quarter and domestic checks remaining consistent," Huberty said. She thinks September quarter Wall Street estimates "imply a low bar," and the fact that Morgan Stanley's Asia Hardware team recently raised its September quarter iPhone builds estimates making her more optimistic.
Huberty moved her revenue estimates for the third quarter (June) up to $53.85 billion from $53.6 billion. Her earnings per share estimates remains at $2.14.
More importantly, Huberty said, her raised price target comes as "we see multiple catalysts into 2020." One is 5G. "Exiting 2019, we expect investors to shift focus to the potential 5G iPhone in September 2020," she said. "Historically Apple shares begin to price in significant iPhone launches (such as the iPhone 6 launch in 2014 or the iPhone X launch in 2017) up to 9 months ahead of the launch date."
Caution From Alliance Bernstein
Alliance's Toni Sacconaghi, who has a market perform rating o Apple, struck a decidedly different tone in a note on Monday, writing that Apple's "outlook for FY20 is arguably more uncertain than in prior years, given that Apple will be launching several major new Services, questions about the trajectory of replacement cycles remain, and rumors about next year's iPhones appear less than definitive."
Speaking of Apple's Services business, he wrote that "we worry that consensus estimates in Q3 (we are at +12.4% vs. consensus at +14.9%) and Q4 (+15.2% vs. +16.6%) may be aggressive, given decelerating installed base growth and tough comps in Licensing + AppleCare." He added that "we have not yet modeled any of these new revenue line items within our Services forecast of +14% in FY20." Apple TV Plus, Apple Card, Apple News Plus, and others are among the new services offerings that Apple announced earlier this year.
As for the iPhone upgrade cycle, Sacconaghi wrote that "Apple's FY20 iPhone lineup looks largely identical to its FY19 lineup of the XS / XS Max / XR, with the main difference being an additional third camera on the updated XS and XS Max for wide angle photography," Sacconaghi said. That "would suggest to us the risk of another relatively muted product cycle."
Sacconaghi's price target is $190.