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Apple (AAPL) Stock Has Had a Good Run, But Can the Momentum Continue?

support@smarteranalyst.com (Ben Mahaney)

Apple (AAPL) had a solid month in terms of stock returns given the slew of announcements tied to services, Chinese iPhone price reductions, and analyst commentary mostly positive in the weeks leading into April. While, there’s a lot of momentum tied to the stock price, the expectations tied to the business and whether there’s still an upgrade ramp for new devices has been explored further among analysts on the street. Expectations tied to Q2’19 earnings are modest, as device shipments are expected to remain flat to negative when pertaining to Apple iPhone given the fallout from the prior-quarterly earnings announcement.

Apple stock managed to rally from $180 to $200 per share in the past month. Sustaining this type of stock price momentum is contingent on a number of factors going correctly. Perhaps on-going efforts to figure out the China related issues, announcement of new products, and some more momentum on product refresh or upgrades throughout the course of the year. The stock price recovery could be aggressive otherwise, as the S&P 500 is already hovering near all-time highs, and so if the broad market is buying up stocks in general, Apple’s recent price improvement may have less to do with the company, and more to do with broadness of optimism for stocks in general.

To sustain momentum some believe Apple should cut the price of the iPhone XR (lower-end equivalent of the iPhone trifecta), which could improve demand for the iPhone in general in regions like China were the pace of upgrades have slowed considerably.

Daniel Ives from Wedbush mentioned in a note (while also raising his price target from $215 to $225):

"Cutting prices in China on XR by up to 20% and pulling forward roughly 15 million-20 million iPhones (based on our estimates) over the next 3-6 months that would otherwise sit idle waiting for the next release, or worst case, move to lower priced competition is key as the last thing Apple can risk now is writing off an entire upgrade cycle in China. We maintain our OUTPERFORM rating and are raising our price target from $215 to $225 to reflect more stable demand trends in the field and a valuation starting to get more "Street cred" for the linchpin services segment."

The key is whether or not Apple is going to do any further price adjustments in China when pertaining to its lower-end equivalent device. The upside scenarios tied to further price reduction could be the difference between a solid or great year in terms of unit shipments, albeit it’s difficult to determine what the optimal price point would be, as lower pricing for XR would translate to lower ASPs.

Furthermore, we’re nearing full saturation among certain demographics in the United States with more affluent households among gen Z skewing predominantly towards iPhone and not Android devices.

Source: PiperJaffray

Currently, 83% of teenagers who partake in the PiperJaffray survey disclose that they own an iPhone device, and of that figure 86% anticipate that their next phone will be an iPhone. This implies a very modest growth scenario here in the United States, as we’re nearing full market saturation among the younger age cohorts. It’s certainly possible that upgrades could help, but we’re at the point where Apple would need to spark a miraculous turnaround in China, as there’s little growth opportunity, but healthy enough upgrade opportunities to keep revenue flat or growing by single digits in the United States.

The iPhone business is starting to transition into more of a cash cow business, and efforts to further saturate the smartphone market while noteworthy will eventually lead to diminishing returns. Apple’s strategic execution tied to other device and service categories drive the growth narrative going forward, but the iPhone business needs to remain stable with flattening comps to keep shareholders from panicking.

To read more on the nitty gritty of what’s going on in the tech industry, click here.

Disclosure: The author has no position in Apple stock.

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