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Apple Inc. (AAPL) Watch Estimates Slashed in Half By JPMorgan

Apple Inc. (AAPL) Apple Watch

Apple Inc. is unable to convince JPMorgan of the potential for Apple Watch, and the analysts there have slashed their watch estimates for fiscal 2016 from 23.5m by almost half i.e. 11.9m shipments. The analysts believe – by the end of 2017 – the wearable will penetrate only 7% of its addressable base versus the previous assumption of 15%.

Apple Inc. (AAPL) Apple Watch

Apple watch fails to  impress

Speaking on CNBC’s ‘Fast Money: Halftime Report’ on Thursday, one of JPMorgan’s analysts – Rod Hall – said, “we’ve seen demand weakness on that watch below what we had anticipated. We think it’s a great product; it’s just that the traction for these watches, people still haven’t figured out what they want to use them for.”

It is expected that by the end of this year, the next-gen Apple Watch will be out in the market. DigiTimes – a well-renowned publication because of its insight into Apple’s supply chain – recently reported that the iPhone maker is making components and chips for the Apple Watch at a brisk pace. Orders suggest the firm might ship 2m units per month.

This estimate is considerably high especially because the watch, which gained a lot of publicity last year when it made its debut, unfortunately failed at impressing the customers. The revenue that Apple Inc. makes from its wearable device has been kept a secret till now, but a report in Forbes – in April – said the watch saw a sequential decline in sales during the fiscal Q2.

For the iPhone, Hall projects the firm to sell 68m units – well behind the consensus estimate. The analyst believes that softening market demand is a major headwind for Apple even now.

2017 – to be good for Apple

With the watch estimates lowered and price target on Apple shares slashed from $125 to $105, JPMorgan – in a note to clients on Thursday – said it based the new price target on the valuation of 10 times price-to-earnings which excluded cash. At this valuation, Apple is at a discount to peers that are trading on an average of 12.7x, the note said.

It further said that the stock will likely be driven lower by the challenging short-term fundamentals till the time expectations are reset to the current macro reality. As per the analysts, they are very much confident on the availability of several growth drivers for Apple Inc. that can propel the earnings in 2017.

However, the note said the macro demand weakness will definitely challenge fundamentals in 2016 vs. the consensus expectations. But, an inexpensive valuation and the likelihood that 2017 will be a significantly better year, will offset this potential weakness in numbers, the note said.

At 10.35 EDT today, Apple shares were down 2.14% at $95.48. Year to date, the stock is down over 11% while in the last one-year, it is down almost 25%. The stock has a 52-week high of $132.97 and a 52-week low of $89.47.

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Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.

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