The third quarter, which ends Saturday, started strong for Apple as Wall Street eagerly awaited the release of its next generation iPhones. Apple stoked that enthusiasm in August when it reported better-than-expected third quarter results and guided for fourth-quarter sales at the high end of consensus estimates. The upbeat forecast indicated that Apple was feeling optimistic about upcoming iPhone sales, helping push the stock to record highs.
On top of that, investors became increasingly convinced that Apple would experience a sales "super cycle" driven by the release of the 10th anniversary iPhone X. But it was those expectations, coupled with the fact that, historically, Apple's stock tends to decline following an iPhone launch, that would eventually cause the stock to come under pressure in the back half of the quarter.
Apple's stock rallied all the way up to Apple's Sept. 12 event, but started to fall almost immediately after the new phones were introduced. By Sept. 25, shares had slid 9% from earlier highs to about $150 a piece, shaving off more than $50 billion from its market cap. As of Friday afternoon, Apple is valued at just over $796 billion.
"Our view was that there was going to be some profit taking in the stock, given the run-up ahead of the announcement," said CFRA Research analyst Angelo Zino. "We thought the 3Q results had alleviated the few concerns because of guidance, then Sept. 12 happens and the iPhone X wasn't shipping until Nov. 3. That's the reason for the pronounced pullback in the shares."
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It will be "extremely critical" for Apple to meet that Nov. 3 ship date for the iPhone X in order for its stock to recover, Zino added.
FBN Securities analyst Shebly Seyrafi believes that Apple's stock is primed for recovery because most of the risk is already priced in.
"Our call is to buy Apple's stock on weakness," Seyrafi said. "Shares could fall a bit more near term, but we believe much of the near-term concerns have become fully priced in."
Apple's fourth-quarter results don't depend as much on when the iPhone X ships. Zino believes there will be enough demand and channel filling to the point that there shouldn't be "any doubt at all" about Apple meeting expectations for the fourth quarter. Zino and other analysts have noted that Wall Street is likely underestimating the iPhone's average selling price for the quarter (Apple surprised investors by pricing the iPhone 8/8 Plus $50 and $30, respectively, above their predecessors) which should help generate ASP upside and buoy Apple's top line results for the quarter.
"So even if shipment numbers come in soft for the September quarter and even if December's expected shipments are below expectations, I think the top line should be OK in the sense that ASPs should come out better than what the street is looking at," Zino said.
Due to supply constraints, it's unlikely that the iPhone X will show up in Apple's financials until the December quarter or, more likely, the March quarter. But once it does, Zino said it's likely to tip Apple toward record results.
"I don't think anyone has any clue of how much supply or demand we're dealing with," Zino explained. "We're talking about the biggest cycle we're ever going to see with the iPhone X."
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