Jeffry Kvaal, an analyst at Nomura’s Instinet brokerage agency sent out a note yesterday morning, downgrading Apple’s stock rating from “Buy” to “Neutral”. Why did this happen exactly? He believes that the stock gains for the iPhone X are in what he’s calling “late innings”. The note reads “we believe unit growth, if not quite ASP growth, is well anticipated by consensus and a historically full multiple”. But that’s not all, Kvaal also noted that Apple’s services arm still only accounts for about 15% of the company’s overall operations. Most of the company is dependent on hardware sales. Which puts the iPhone X in an interesting position.
What am I talking about exactly? This hasn’t been a typical year for Apple, although some argue that it should be. Normally, we would have only seen the iPhone 8 released this year, which was released in September 2017. This follows a typical pattern for Apple. Although, they have released other phones that supplement the main phones, but at different times of the year. Think the SE or the iPhone 5c. It’s suggested that the release of the iPhone X is actually causing the unusual pattern in Apple’s stock.
The other possible reason for the change in the stock is that the iPhone X is radically different from all other iPhones before it. Does this sound familiar? It should as I’ve been saying that for months. Apple has even billed the phone as “the future of the smartphone”. This is why analysts and investors started to talk about a supercycle, where the bulk of customers coming from the older iPhone 6, were predicted to move towards the iPhone X.
Kvaal has a different theory though. He suggests that the shares fell 41% after the iPhone 5 launch, and 27% after the release of the iPhone 6. Obviously, the shares recovered, but it took approximately 20 months to do so – in each case. Which means, he thinks this is normal. In addition, he suggests that the tax reform won’t be enough to change this historical pattern. Other analysts, however, don’t have the same opinion as him. They are suggesting that the reaction to the iPhone X launch sent Apple watchers into a frenzy, and therefore the stock is doing well.
Nomura has reduced its fiscal 2018 iPhone unit sales forecast from 265 million to 245 million, roughly in line with consensus forecasts of 242 million. In addition, the firm has reduced its 2018 earnings per share estimate from $11.75 to $11.50.
Despite the downgrade, Kvaal says Apple remains a “reasonable investment” for shareholders who intend to hold the stock for an extended period of time and can afford to ignore the impact of individual iPhone cycles. He says Apple’s services growth, its enterprise business, the Apple Watch and other initiatives are signs that Apple’s innovation will continue to drive the company for years to come. In addition to the “neutral” rating, Nomura has lowered its price target for Apple stock from $185 to $175. If this is a “normal” cycle that Apple goes through every few years, then this isn’t something anyone should be worried about right? It seems that way, so if you’ve got Apple stock already and can wait, you’ll likely be in good shape.