Apple Inc. (NASDAQ:AAPL) investors have failed to acknowledge the risks beyond the expected boost the new iPhone is expected to bring to earnings, analysts at Pacific Crest have warned.
In a rare analyst downgrade, Pacific Crest cut its long-held ‘overweight’ rating on the stock to ‘sector weight’.
“At current levels, we believe investors are anticipating an extremely strong iPhone 8 cycle, while giving relatively little weight to risks around gross margins, elasticity, supply issues, or the likelihood for declines beyond the iPhone 8 cycle,” said analysts Andy Hargreaves, Evan Wingren and Tyler Parker, at Pacific Crest, in a note to clients dated Sunday.
Apple has received praise from a number of investors about its prospects for the release of the iPhone 8 in September.
Apple first company to see market valuation surpass US$800bn...
The tech giant became the first company to see its market capitalisation surpass the US$800bn mark in early May after analysts at Drexel Hamilton predicted its valuation could reach US$1trn.
RBC Capital also sees Apple topping a US$1trn market valuation within the next 12 to 18 months, saying the group’s revenue and margins have the potential to grow as the launch of the premium-priced iPhone 8 are expected to lift average selling prices.
Goldman Sachs echoed these comments, saying the pricier iPhones, including a 128 gigabyte model for at US$999 and a 256 gigabyte model for US$1,099, could improve gross margins.
Limited upside to current expectations of iPhone 8, says Pacific Crest
But Pacific Crest sees limited upside to current expectations to the next iPhone. Many analysts predict fiscal year 2018 iPhone unit growth in the mid-to-high-teens with expanded gross margins that could bring earnings per share toward US$12.
“This would likely require strong growth in sales to new users and extremely strong replacement volume, a combination that seems unlikely,” Pacific Crest argued.
It sees a decline in sales to new users and expects lower replacement rates to push iPhone sales lower in 2019 after a better-than-usual 2018.
“This combination is likely to drive iPhone unit sales down in FY19, with the magnitude of decline likely being positively correlated to the magnitude of upside in the iPhone 8 cycle. In other words, the better FY18 is, the worse FY19 is likely to be,” the analysts said.
Apples shares have risen more than 34% in the year to data but have struggled since reaching a mid-May 52-week high of over US$152. It market capitalisation currently sits at US$822bn.