Are Apple iPhone Estimates Too High?

• Apple Inc. (NASDAQ: AAPL) shares have risen 7.24 percent over the past five trading days, reaching a high of $119.122 on October 23.
• Andy Hargreaves of Pacific Crest Securities has maintained a Sector Weight rating on the company.
• Although Hargreaves believes that the long-term risk-reward of the stock is favorable, the consensus expectations for iPhone units in 1H:F2016 might be too high

Analyst Andy Hargreaves believes that “AAPL's valuation and the stickiness of iPhone customers should protect long-term cash flow and support stock appreciation as investor focus shifts beyond the iPhone 6s cycle.”

For FQ1, the Pacific Crest estimate for gross margin is 39-40 percent, while the consensus forecast is 39.8 percent. However, Hargreaves believes that any concerns surrounding near-term iPhone units are mostly priced into the stock.

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“If gross margins are holding, longer-term investors can feel confident in continuing to own AAPL, almost regardless of iPhone units. Conversely, if gross margins are pressured, it could undermine longer-term expectations for profit stability,” the Pacific Crest report said.

The revenue estimate for FQ1 is $67 billion-$70 billion, while the consensus expectation is for $76.4 billion. Since the company does not provide unit guidance, Hargreaves believes that investors will need to “tease out other categories, including Apple Watch,” which is expected to see a significant quarter-on-quarter unit volume increase due to an expanding channel and seasonal sales.

For FQ4, the iPhone unit estimate is $7.8 million, while the consensus forecast is for $48 million.

“Investors will view this as an indicator of run-rate demand headed into the 6 cycle which, along with FQ1 revenue guidance, will help hone iPhone estimates going forward,” the report added.