Understanding Apple: Three Keys To Stock Price – 3. Looking Ahead

Apple  share price has been slammed recently, falling as low as $92.43 last Wednesday. The question for investors is whether this downward trend will continue, if the price will remain range bound as it has for over a year, or if share prices will reverse and continue to appreciate.

I have identified three key factors in the future value of Apple stock. The first article focused on iPhone sales which many see as leveling off in growth, or even declining in the current year. Since this product currently accounts for well over 60% of Apple’s income, this would clearly affect performance. Fears over this are what drove the price down.

The second post focused on how the Services and Other Products categories – particularly the new Apple Watch – will likely drive moderate growth.

In this post we will examine what may be the most important influence on Apple stock price:

  • Apple’s forward guidance for the March quarter

The issue is growth. Can Apple continue to grow, or will it stagnate or even see a decline in its revenue base? Some have suggested the latter – that revenue will decrease due to iPhone sales falling short of last year’s numbers.

Market Realist reported on Dec. 16:

  • On December 14, 2015, Morgan Stanley (MS) lowered its fiscal 2016 forecast for Apple’s (AAPL) iPhone units by 12% and earnings per share (or EPS) by 6%, driven by weak smartphone supply chain data points.
  • The estimates for Apple’s iPhone shipments in the December quarter were reduced to 75 million units from 79 million units. For the March 2016 quarter, estimates have been lowered to 52 million units from 61 million units. [emphasis added]

This figure of 52 million units would be about 15% lower than last year’s March quarter. Additionally, it’s possible that revenues from iPhone could slip even more, as the purchase of newer 6s/6sPlus models is supposed to be lower proportionally than were the 6/6Plus models last year. (This makes perfect sense since last year’s models introduced the larger formats which were major purchase drivers. Now you can buy last year’s model and still that a larger screen.)

It is likely that Apple will provide a reasonably realistic guidance. The last thing they want is to be too high, and they have all the data.

There are two possible conditions here:

1 – These reports of reduced supply chain orders are indeed correct and reflect overall Apple sales. If so, then we can expect Apple guidance to be for lower revenue than last year.

2 – The reports are either not accurate, overblown, or for some reason do not reflect the real picture. In this case, given new income sources, we would expect guidance to be somewhat above last year’s $52 billion.

It should be noted that Apple gives overall revenue projections, and never breaks figures down to the product or other categories. Thus, if the company expects other product areas to make up for lost iPhone sales (as I have suggested in previous posts) then we would not be able to see this – at least not directly.

Outcomes

Thus the guidance will be a major driver of stock price. It will signify whether the current negative growth meme has validity or not.

This leaves us with several potential reactions to the guidance.

A: Dire

The guidance is even lower than expected, and current sales are significantly below current expectations. This would lead to a further drop in share price, perhaps a dramatic one.

B: Inline with current expectations

If the current sales and revenue are within the Apple guidance range, and the new guidance shows only a modest decrease to on par revenue, then we are likely to see Apple share remain in the current range for some time to come as investors see how long the new condition lasts. That is to say, does Apple recover in the June or September quarters, or does this slowdown hold into next year?

C: Normal

If condition #2 above proves to be the reality, and we see some moderate growth in the guidance – say the 2% to 12% range – then there should be a rather strong rebound, perhaps going to new highs (current high $134.54 – 28 April, 2015).

The current price ($101) has a lot of the negative news built in, so any rebuttal of the premise should trigger a real rebound. Even the earlier retractions from last April’s high have been based on negative suppositions, so we could easily move to new highs on just a reaffirmation of a normal revenue growth trajectory.

D: Positive news

In this scenario, not only is condition #2 met, but the negativity is proven to be completely wrong. In this scenario, December quarter sales/revenue are above expectations, new products are adding to growth, and guidance is for 15+% growth. Tim Cook announces in the conference call “Clearly iPhone sales are not growing at the rate of last year, but we expect growth to remain modestly positive going forward.”

If this scenario should take place, then the stock price will rocket soon eclipsing the old highs.

Conclusion

The point here is that Apple detractors have ignored likely growth areas when focusing in on slowing iPhone sales. Clearly such sales cannot continue to increase at 40% – or even 25% – forever.

The news from suppliers appears to be so consistent that it likely has some validity, and we will probably see modest contraction in y/y iPhone and company revenue in Apple’s March quarter guidance. This would put us in either outcome B or C, depending on the severity of sales retraction, and the amount to which new products fill the iPhone revenue shortfall.

In both cases, however, modest to strong share price recovery will follow. Obviously, this is not necessarily a decisive one or the other situation but could be a grey area in between.

Your comments are appreciated.


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Then please check out my short fiction anthologies.

(Both available in both Amazon and iBooks stores.)

Also at 50CentFlash.com


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