Despite Soft Demand, Growth For iPhone 7 Makes Apple Attractive

Pacific Crest’s Andy Hargreaves maintained an Overweight rating on Apple Inc. (NASDAQ: AAPL), while lowering the price target from $132 to $127.

Pacific Crest’s demand and supply suggest that the sales volume is tracking at the low end of the company’s guided range for FQ2, albeit mostly stable over the past two months.

Analyst Andy Hargreaves, however, believes that “valuation and the likelihood for strong growth in the iPhone 7 cycle make the risk/reward around AAPL attractive.”

Solid iPhone 7 Cycle

Hargreaves mentioned that replacement dynamics continue to indicate robust growth in the iPhone 7 cycle, with no evidence of iPhone customers exiting the platform at higher levels.

Related Link: Rumor: Apple iPhone 7 To Be Thin

“If this remains the case, we continue to believe normal replacement dynamics will drive mid-teens iPhone unit growth in the iPhone 7 cycle, which should drive commensurate EPS growth in F2017,” the analyst stated.

iPhone SE To Protect Margins

In addition, Hargreaves believes that the iPhone SE is unlikely to change the broad dynamics for iPhone, although it is likely to safeguard the company’s margins.

The new “low-end” iPhone is scheduled for launch on March 21, which suggests that Apple intends to discontinue the iPhone 5 “rather than waterfall it to the low end when the iPhone 7 launches.”

Viewing this as a positive, Hargreaves pointed out that this would help mitigate any potential trade-down activity that could otherwise impact the gross margin.

The FQ2 iPhone unit sales estimate has been lowered. According, the FQ2 revenue estimate and the F2016 EPS estimate has also been lowered.