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Apple guidance leads to Street panic, though some analysts cite 'cyclicality'


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Apple guidance leads to Street panic, though some analysts cite 'cyclicality'

Apple Inc.'s sudden lowering of its revenue forecast for the holiday quarter sent Wall Street into a frenzy, leading several analysts to downgrade the iPhone maker's stock. Other analysts, however, defended Apple, saying the firm's innovative edge and strong brand loyalty should help it regain investor confidence.

Apple shares plunged nearly 10% to close at $142.19 on Jan. 3 the stock's lowest value since April 2017 after the company on Jan. 2 cut its fiscal 2019 first-quarter revenue forecast due to weaker-than-expected iPhone sales, primarily in Greater China. In a letter to investors, Apple CEO Tim Cook said the company now expects revenue of $84 billion for the quarter ended Dec. 29, 2018, down from its earlier guidance of $89 billion to $93 billion. Apple in November 2018 had warned of softer-than-expected sales for the holiday season.

Apple reportedly cut production orders for all three of the iPhone models that it unveiled in September 2018. The iPhone XS and iPhone XS Max, which retail for $999 and $1,099, respectively, began shipping in September 2018. The cheaper iPhone XR, starting at $749, did not ship until late October 2018.

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Wedbush Securities analyst Daniel Ives in a report called the Jan. 2 announcement Apple's "darkest day in the iPhone era," saying it will weigh "heavily" on the company's stock. The analyst, who lowered his price target on Apple shares to $200 from $275 while maintaining an "outperform" rating, said China remains Apple's "Achilles' heel" and urged the company to lower iPhone prices ahead of its annual iPhone release in September in order to boost demand in that region.

"Apple's decisions over the coming months around pricing, future hardware redesigns, timing of 5G smartphones, and driving its core services business will have implications for years to come as [Apple] now faces the biggest fear among bulls," Ives wrote.

Goldman Sachs analyst Rod Hall similarly slashed his price target on Apple shares to $140 from $182 and cut his fiscal 2019 revenue estimate by 6% to $253 billion, saying in a note that the rapid growth period for Apple's iconic iPhones may soon be over.

"We believe that focus should now shift to average selling price decline potential in 2019 as weaker macro and [foreign exchange] may push consumers toward less expensive iPhone models," Hall wrote.

Nevertheless, some analysts are still largely bullish on Apple.

Gene Munster, a managing partner at Loup Ventures, said he still expects Apple to outperform its tech peers, such as Facebook Inc., Inc., Netflix Inc. and Alphabet Inc., during 2019. Munster said Apple's services business, which includes Apple Music and its iCloud computing service, along with its MacBooks, iPads and wearables, will diversify the company's business beyond its core iPhones. He added that the stock market has historically reacted to Apple with "cyclicality."

Nomura analyst Jeffrey Kvaal also noted that weak iPhone demand "seems partially cyclical," adding that Apple's services segment and other products are faring well and its base of mobile users remains loyal.

"Services sales of $10.8bn (up 28% YOY) beat consensus $10.5bn. Wearables grew 50%, the MacBook Air lifted Mac sales, and iPad sales rose >10%," Kvaal wrote in a report. "Perhaps most importantly, the installed base hit an all-time high; iOS remains as sticky as ever."

Apple remains a strong leader in the smartphone market despite softening iPhone demand in China, agreed Michael Kramer, founder of investment advisory firm Mott Capital Management. Yet he believes the company's future actually lies more in its software than in its devices.

"It'll be more about what the software's going to do for you in the future than what the hardware's going to do," Kramer said in an interview. "From that standpoint, I think Apple is very well-positioned. It has a very loyal customer base, and it's going to be hard to get people to move away from its platform."