Apple Inc. (AAPL) Cracks: Here’s Why (And Why Not to Worry)

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Apple Inc.  may not be able to beat last year’s December quarter sales numbers after all. A report from Credit Suisse, which rocked Wall Street on Tuesday morning, argues that the firm is ordering fewer parts for its iPhone 6S in Asia. The report, which was authored by the Credit Suisse Asia Technology Team, has had an unnerving effect on shares in Apple on Tuesday morning.

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At time of writing shares in the iPhone maker were down 2.75 percent to $117.25. That’s not anything like a low for Apple, nor is it close to any of the recent lows set by the firm. The problem is that at the start of the month shares briefly sold for their highest level since August’s China flash crash. Now they seem to be on a downtrend again, and Credit Suisse is helping to drive the stock lower.

Apple cuts iPhone orders says CS

Apple  traders, once worried about the state of demand for the iPhone, seemed pretty happy after the firm released its numbers for the three months through September. Tim Cook, apparently brimming with confidence, said that his firm was seeing strong demand for the iPhone 6S in China, and elsewhere. The firm guided for sales that suggested strong iPhone unit shipment.

Credit Suisse reckons that picture may be a little overly rosy. Apple has, according to the firm, dropped parts orders by about 10 percent. Kulbinder Garcha, who lead the team, wrote “In our view, the continued weak supply chain news could weigh on Apple shares for the next few weeks/quarters.”

That conclusion lead CS to lower its EPS outlook for the full year 2016 by 6 percent. It’s not a monumental drop, but it means that Apple is closer and closer to being flat year-on-year, or worse off. That’s something that Wall Street really doesn’t want to see from a firm that’s been the heart of every growth story for a decade.

Apple can’t rely on iPhone sales

The relaxed atmosphere around iPhone questions lasted until this week. The Credit Suisse report came on the top of an Apple decline that has been underway since the first days of November. The Federal Reserve is raising rates, leading Wall Street to question the value of the stock market as a whole. Now Credit Suisse wants Wall Street to question Apple’s growth prospects.

Apple is very reliant on sales of the iPhone to drive its earnings and revenue. If the firm is indeed cutting orders for parts, as this morning’s report suggests, that’s going to hurt the firm’s first quarter and may leave it more open to market turbulence as Federal Reserve ease eases off.

Apple simply has nothing to pick up the slack in terms of growth, though the firm still has a lot of hope going forward. Right now the Apple Watch is really unlikely to sell in enough volume to fill in any sort of gap left by the iPhone, while the firm’s service business, in things like Apple Music and Apple Pay, is still nascent.

It seems, if Credit Suisse is right about the supply situation, that Apple will not be able to rely on the iPhone 6S for growth in the year ahead. At the same time there’s little else able to fill in for the failings on that front.

Luckily then, Credit Suisse, and other Wall Street firms, don’t think it’s quite time to worry about Apple just yet. Garcha, despite dropping EPS forecasts, doesn’t think it will affect the value of shares in the long term.

Stay happy about Apple

Despite the warning of lower than thought sales of the iPhone in the fourth quarter, Credit Suisse reckons that Apple is still doing pretty well. The firm kept a $140 price target on shares in Tim Cook’s firm and argued that even though EPS would be lower next year, the firm still has plenty of catalysts working for it.

Credit Suisse names multiple good things about the Apple iPhone business to support its high price target. In the firm’s view the install base will keep growing even if overall iPhone sales do not. At the same time the firm’s high device retention, a stat that’s unrivaled among other hardware makers, is still strong, and rumors that a 4 inch iPhone is coming next year could result in higher sales.

Credit Suisse, despite its EPS cut, is still bullish on Apple, but it’s not the only one. Daniel Ives of FBR, in a research note published on November 9, says that the firm has a great year ahead of it in 2016.

In his view, legacy iPhone 6 upgrades will combine with iPhone 6S sales in order to deliver strong sales for the full year 2016. At the same time Apple’s slew of new products, including a new streaming service he expects to see in the first quarter, will add to the firm’s sales.

Mr. Ives reckons that Apple’s shares are worth $175 each, and he thinks the firm could boost its buyback program by another $75 to $100 billion next year.

Quarz Capital sees Apple’s new services coming down the line, and thinks that the firm should change the way it reports its numbers in order to show the real value of that growth to Wall Street. The firm issued a letter addressed to Tim Cook on Tuesday morning arguing for the change.

In the view of the investment firm, which is based in Georgetown in the Cayman islands, Apple should report Software & Services in a new segment in order to show Wall Street the growth in the segment as Apple transitions into a new phase.

“With the split out of the operating results of S&S from the hardware segment, we view that investors will better appreciate and value the tremendous growth dynamics and rich margins of the different S&S product lines such as iTunes, App Store, Apple Music, Apple Pay, enterprise offerings and future new service offerings, ” Quartz’ CIO Jan Moermann wrote in the letter.

There’s still a huge amount of value hidden away at Apple in the view of Quartz, and Tim Cook would do better by showing off that value instead of keeping it hidden in the background. The investment firm reckons that Apple’s shares are worth $200 each or more.

There’s lots of good news for Apple, and a lot of very positive analysis out there. The moves that Credit Suisse has recorded in the firm’s Asian supply chain may not be anywhere near as powerful as Mr. Garcha and his team suspect. Apple may simply be moving orders around, or the firm may have over-ordered for some other reason.

We won’t find out for sure until Tim Cook and Luca Maestri reveal the firm’s results for the three months through September. That reveal will come some time toward the end of January. Until then Apple’s shares are likely to move strongly on rumor as Janet Yellen and the rest of the Fed board set up volatile conditions for fourth quarter trading.

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