The last two weeks have been far from kind to Apple Inc. AAPL. The discovery that it was deliberately slowing down older iPhones in order to compensate for ageing batteries came as an unwelcome surprise to devotees of the brand. Further, reports and projections emerged indicating that iPhone X and overall iPhone sales may be lower than earlier expectations.
These events caused the stock to stutter toward the end of 2017 even though it has subsequently chalked up gains at the start of the New Year. This is not the first time that some degree of skepticism has built around the prospects of the world’s most profitable company. But for once, such concerns seem to have a solid foundation, which is why it is crucial to examine whether Apple’s stock can live up to its promise going into 2018.
Could iPhone X Sales Dip in 2018?
Apple’s stock enjoyed a strong 2017 with the stock gaining nearly 47.7% over the past one year. It is widely believed that the iPhone maker is one of the key catalysts of the current market rally along with other tech giants who make up the FAAMG group, namely Facebook, Inc. FB, Amazon.com, Inc. AMZN, Netflix, Inc. NFLX and Alphabet Inc. GOOGL.
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This is why it was something of an unwelcome surprise for investors when shares of the iPhone-maker plummeted 2.5% on Dec 26 — its worst decline since August. The decline occurred after Taiwan’s Economic Daily reported that the tech-giant was planning to cut its current quarter sales forecast for the new iPhone X by 40% to 30 million units, down from the initial 50 million units. No formal statements were released by Apple on this issue.
Further, on Jan 2, CLSA cautioned that prevailing iPhone X sales projections remained unrealistically high despite a recent rollback in investor expectations. The investment bank said in a note that since fourth quarter sales expectations had dipped and first quarter 2018 figures were unlikely to pick up, investors were being overly optimistic about Apple’s stock. Analysts at CLSA feel there is little pent up demand for the iPhone X since those customers who were wanting to pick up an iPhone X in December 2017 had likely already done so.
However, analysts at Piper Jaffray backed the stock to move higher citing a recently conducted survey of 400 iPhone buyers. According to the investment bank, the survey shows that a substantial number of new iPhone models will be sold in 2018. In fact the firms projects iPhone X and iPhone to make up 38% and 40% of all iPhones to be sold this year.
Such findings validate existing assumptions of an average selling price of $720, which in turn backs revenue and earnings estimates. Both firms believe that Apple could cut the price of iPhone X or issue a lower priced model if volumes remain low. Apple has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Batterygate Strikes
Even as Apple declined to comment on reports that it would likely cut its quarterly iPhone X sales forecast, a user reported that his iPhone 6s was becoming slow since its battery could no longer become completely charged. The matter was investigated in depth by Geekbench founder John Poole who discovered that a software update was intentionally slowing down older iPhones.
Following these revelations, Apple admitted that it had indeed slowed down older iPhones in order to preserve battery life. Shares of Apple shares slumped 1.1% on Dec 29, 2017 after apologizing for the lack of transparency related to handling of iPhone performance with older batteries. Further, it announced on its website that battery replacements for older iPhones would now cost only $29, which is $50 lower than the original cost of $79.
Shares of Apple rose 1.8% on Jan 2 after it said that such replacements would begin on an immediate basis and not from next month. Apple has also promised to offer a software update which will provide more information about the health of an iPhone battery.
However, Apple has been widely criticized for not being forthright about this issue. Further, analysts at Barclays PLC BCS believe that the new battery replacement offer could result in 16 million fewer iPhones being sold this year. This decline translates into a revenues loss of more than $10 billion. One crucial assumption being made by Barclays while issuing this projection is that a weaker battery is the primary reason for users to upgrade their iPhones. This is one of the findings of a survey carried out by the bank in August 2017.
Upside Heading into 2018
It isn’t that 2018 only offers multiple threats to Apple’s share price; the coming year also offers numerous opportunities. Firstly, the passage of the Tax Cuts and Jobs Act of 2017 will provide Apple with the opportunity to repatriate cash reserves of nearly $269 billion held overseas. This could raise the company’s propensity to give back cash to its shareholders, a definite positive.
Further, analysts at Citigroup Inc. (C) have recently said that there is a 40% probability that Apple may acquire Netflix. The online streaming giant has a market capitalization of more than $88 billion, but that could easily be covered by about a third of Apple’s overseas reserves. Such a buyout would also add to Apple’s services muscle. Apple reported strong fiscal fourth-quarter 2017 results with services revenue rising 34% year over year to nearly $8.5 billion.
iPhone X “Supercycle”, HomePod to Drive Growth
Meanwhile, analysts at investment bank Drexel Hamilton think that the “supercycle” created by the launch of the iPhone X could be stronger than expected. Taking a view contrary to CLSA, and more in line with Piper Jaffrey, the bank’s analysts believe pent up demand will boost iPhone X sales this year.
Moreover, Drexel Hamilton analysts believe that the iPhone X will create an enduring cycle of gains for Apple. This will be fueled primarily by an increase in average sales prices in the luxury smartphone segment.
Meanwhile, Apple has delayed the launch of its smart speaker, the HomePod, which will likely be released early this year. This new addition to Apple’s ecosystem of products will take on Alphabet’s Google Home and Amazon’s Echo. This is likely to provide another fillip to the stock going forward.
Apple Remains a Great Bet
Before summing up, it may also be instructive to analyze the stock from a valuation perspective, an issue which has reared its head often last year. Here, we are utilizing the stock’s Price to Earnings Growth (PEG) ratio in order to evaluate it from the valuation perspective.
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This is the most appropriate ratio since it takes into account the differences in growth witnessed among high growth tech stocks. Additionally, it takes into account the future earnings potential of the company. PEG ratios indicate that Apple is significantly undervalued, since its PEG of 1.37 is lower than the S&P 500’s figure of 2.04.
As for the fracas over Apple slowing down older iPhones, this is certainly an issue which has dented the reputation of such an iconic brand. But given the nature of Apple’s fan following, it could easily be forgotten in the months to come unless another major slip up happens on the company’s part. Apple has already taken corrective steps to address this issue and the stock is likely to deliver much delight to consumer and shareholder alike in the months ahead.
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