A closely watched Apple analyst Wednesday highlighted some potential noise surrounding the iPhone maker’s upcoming December quarter, underscoring why we routinely caution against trading in and out of shares. Apple stock (AAPL) has not been spared this year’s tech rout. However, while down roughly 24% in 2022, the company still has a market value of around $2.15 trillion. In a note to clients, Bernstein analyst Toni Sacconaghi discussed two main reasons why he believes Wall Street’s consensus estimates for Apple are too high and, as a result, why he thinks they could be revised down in the future. Reason No. 1 The first is Apple’s announcement over the weekend, in which the tech giant said it would cut production of the iPhone 14 Pro and iPhone 14 Pro Max due to Covid restrictions at a key assembly plant. in China. Even though it continues to see “strong demand” for high-end phones, Apple is now expecting fewer shipments than it “previously anticipated and customers will experience longer wait times to receive their new products,” according to the company’s press release. Sunday. Sacconaghi expressed some problems with Apple’s press release, arguing that it was “vague in not defining the period in which Apple expects lower shipments, i.e. just the December quarter or the full year.” “Furthermore, the fact that the launch came so early in the quarter (when Apple could apparently make up for lost production days) raises the question of whether demand for the iPhone or other products played a negative role, or whether Apple felt that the estimates consensus figures for the first quarter of the fiscal year were simply too high,” wrote the analyst, who has a neutral rating on Apple stock and a price target of $170 per share. Reason No. 2 The second concern Sacconaghi noted goes beyond trying to decipher a three-paragraph press release. Instead, the analyst delved into the impact that Apple’s abnormal calendar for fiscal year 2023 has on Street’s financial models. Apple’s first quarter lasts 14 weeks this year and ends on December 31, instead of the traditional 13 weeks. The analyst believes this could lead to revenue being allocated to the first quarter that would normally be recorded in Apple’s second quarter. This may result in some second quarter revenue estimates being too high. “Our analysis suggests that the consensus has not built an extra week into its forecasts, given that it is modeling a normal historical revenue distribution through FY23. [fiscal year 2023] — that is, it forecasts AAPL to generate 31% of its annual revenue in the December quarter, which is almost exactly in line with its historical average (31.1%),” Sacconaghi wrote. He believes that is potentially incorrect. because the extra week in the first quarter is between Christmas Day and New Year’s Day, “which is usually a strong week for Apple sales.” He continued: “If sales in the quarter are overloaded due to delays in production, the week could be remarkably strong for Apple.” However, the analyst acknowledges that there is another possible scenario: that production delays could be significant enough to drive a large part of sales until January. This means which would then be accounted for as revenue in Apple’s fiscal second quarter, which is generally weaker than the first quarter because the first quarter benefits from holiday sales.” While it is possible that production delays could smooth out seasonality in the first and second quarters, we still believe that 2H FY 23 [second half of fiscal year 2023] and estimates for FY23 are too high,” Sacconaghi wrote. , brand loyalty and free cash flow generation. This context is important for understanding how we think through Sacconaghi’s note and this moment for Apple, in general. We don’t recommend that investors jump in and buy Apple stock here, recognizing that the macro environment is complicating valuations for large-cap tech stocks. This is part of the reason we lowered our target price for Apple stock last week despite its better-than-expected fiscal fourth quarter, also known as the September quarter. Apple shares on Wednesday are trading at about 22 times future earnings, above their five-year average of 21.4, according to FactSet. Factoring in all the risks, such as consumers concerned about inflation and the strength of the US dollar, we think Apple’s valuation is too rich to step in and start buying shares. At the same time, we are not advising investors to exit the stock at this point and then try to re-enter at a lower point. It is too difficult to time the market that way. Instead, Apple shareholders should be patient, especially as we go through a period where there is a lot of buzz around the stock. For example, we are faced with a constant rate of questions about the demand for the iPhone 14, especially if it will remain in the higher-end Pro and Pro Max models. In Wednesday’s note, Sacconaghi suggests that an undercurrent of weakening demand could be at play with the aforementioned iPhone production cuts. We take a different view. While it’s an ever-evolving situation, we believe demand continues to outstrip supply for premium and higher-margin iPhone 14 models for now. Morgan Stanley echoed that stance in a note to clients on Tuesday. As for the extra week in Apple’s first quarter, we’re not obsessing too much given our extended horizon. It’s not something to ignore entirely: it’s useful to acknowledge that some of the estimates could be revised as Street gains more visibility into the direct impact of the unusual fiscal calendar. That process could lead to negative headlines and daily talk at the company. But at the same time, it doesn’t alter our thesis and, if anything, it strengthens our conviction that Apple is a long-term proper name, not a name to make quarter-to-quarter trades. When you take a long-term view of investing, you can process things like an extra week in a quarter with a different perspective than short-term thinkers. (Jim Cramer’s Charitable Trust is long AAPL. See here for a full list of shares.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE FOREGOING INFORMATION ON THE INVESTMENT CLUB IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR DISCLAIMER. 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Apple CEO Tim Cook speaks onstage during day 2 of the Vox Media Code Conference 2022 in Beverly Hills, California.
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A closely watched Apple analyst Wednesday highlighted some potential noise surrounding the iPhone maker’s upcoming December quarter, underscoring why we routinely caution against trading in and out of shares. Actions of Apple (AAPL) have not been spared this year’s technological defeat. However, while down roughly 24% in 2022, the company still has a market value of around $2.15 trillion.