Apple's Tailwind Nobody's Talking About

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Apple  (AAPL) - Get Report may sell more smartphones than currently expected over the next year or so, if the short-term thesis of one analyst is correct.

This is not currently recognized by investors, with the stock up just 0.3% on the day Thursday to $116 a share, even as large cap growth tech peers rose more than 1.5% by 2 PM EDT.

The thesis from Cowen analyst Krish Sankar: The Department of Commerce’s restriction on U.S. semiconductor sales to Chinese telecom and tech giant Huawei is disabling Huawei from selling as many smartphones for the near-term as it had initially planned. "Our latest field work continues to suggest that Huawei's smartphone shipments will see a significant decline in calendar year 2021 due to component procurement challenges following US DoC enacted rules,” Sankar wrote in a note.

It does not seem that analysts have worked this mini thesis into current smartphone estimates, as most have not mentioned this dynamic in notes explaining estimates for Apple’s iPhone prospects.

Sankar said the Huawei situation leaves about 15 to 20 million premium smartphones out of the equation for Huawei and up for market share grabs by other smartphone makers around the globe. Those numbers do not include mid and lower-tier priced devices, just higher priced ones. Without certain chips and components, Huawei cannot procure its devices. This "is perhaps the biggest impediment to Huawei maintaining its market position,” Sankar said. He thinks Apple and Samsung are well-positioned for more market share in the premium segment, with Xiamoi and others in the running for more share in the lower end of the market.

Apple is expected to ship about 209 million iPhones in 2021, according to FactSet consensus estimates. That would be 11% higher than 2020’s expected shipments, as 5G consumer adoption drives much of the upside. Sankar says that for every 5 million additional phones sold, Apple would see a roughly 2% addition to annual earnings per share, or about 7 cents. One can certainly imagine a meaningful EPS tailwind — one in the mid-single digits in percentage terms — if Apple takes 10 million or more additional smartphone shipments.

Sankar’s estimates differ slightly from those of the average Apple analyst on Wall Street. However, using FactSet estimates for average selling price and units sold, analysts are looking for $160 billion in 2021 iPhone revenue. With iPhone prices, on average, around $765 and 5 million of those phones added, that’s about $3.8 billion in revenue added to a total revenue stream for the year of about $307 billion. That adds about 1.3% percent in additional revenue, but Sankar is looking for an additional eps stream on the Huawei development of much more than that because he expects an average selling price on iPhones of $787.

Judging by the post-5G growth in iPhones and the legacy business, and the fact that its stock still trades at 30 times forward earnings, Apple is trading on the long-term promise of services and the wearables market. And the stock has not seemed to move explicitly on the Huawei development, as other tailwinds and headwinds are having more influence on the direction of the stock. In particular, Apple investors want to see the benefits and drawbacks of bundled services and market share, the impact of lower prices on margins and the longer-term viability of Apple’s position in services like streaming and payments. One thing is for sure: Apple’s “sticky” ecosystem and position in the global smart device market is the foundation to its services business.

The point here is that one should not be surprised to see Apple post strong iPhone revenues relative to expectations in the near-term, just one ingredient of the many that move the stock. Plus, if Apple can take the lion's share of the phones left on the table by Huawei, this smartphone tailwind may prove particularly strong. 

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