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Apple Analysts Offer Mea Culpas After iPhone Sales Hold Up

May 2, 2018, 8:33 PM UTC

With a wave of pessimism building about supposedly sinking iPhone sales, Apple surfed above the stormy forecasts to impress Wall Street on Tuesday.

Overall revenue in the quarter ended March 31 increased 16% from a year earlier to $61.1 billion. That included iPhone sales growing 14% to $52.2 billion and met the average analyst estimate. Earnings per share of $2.73 narrowly beat the analysts’ $2.69 average. Apple also made investors happy announcing a 16% increase in its stock dividend and a planned $100 billion share buyback.

Apple’s stock price rose almost 4% to $176.57 on Wednesday, at the high end of the price range where it has been mired since early November. The stock is now up 5% for the year.

The stock jump follows some mea culpas from analysts who were were too pessimistic, misled by reports from Apple suppliers that implied slowing demand for iPhones. But that storyline, which then gave rise to the idea that Apple had priced the $1,000 iPhone X too high, was wrong, UBS analyst Steven Milunovich noted. “The iPhone X is selling better than perceived—the narrative that it is too expensive appears incorrect as users are overall moving up the price curve,” he wrote on Wednesday.

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“Overall, iPhone and services performances put our cautious view in the penalty box,” analyst Mark Moskowitz at Barclays conceded, as he grudgingly raised his price target on the stock to $161 from $157, remaining well below the current price.

It’s now clear that betting on higher prices with the $1,000 iPhone X was not a mistake, as it was Apple’s best selling model every week since it went on sale, according to CEO Tim Cook. And even though much of the opportunity for further growth in the smartphone market is at the low end in emerging markets, don’t expect Apple to go down in price much, Morgan Stanley analyst Katy Huberty said.

“While many investors are asking whether Apple might price its next line of iPhones much more aggressively, management commentary suggested a consistent strategy of pricing to value with each new iPhone carrying more technology and a higher bill-of-materials,” as she wrote. “We do see the weaker dollar and falling memory and other component prices as an opportunity to perhaps lower starting prices modestly, but any significant change in pricing strategy is unlikely, in our view.”

Without offering a much cheaper phone to compete better in places like India and Brazil, Apple may struggle to increase its revenue much with iPhones. After all, it likely can’t increase prices much more and unit sales are almost unchanged over the past two quarters from the prior year.

So many analysts are looking to Apple’s booming services business for growth. Revenue jumped 31% to $9.2 billion. Comprised of everything from sales of videos to Apple Music subscriptions and iCloud online storage space, the unit has more room for growth, Steven Pelayo at HSBC Global Research noted.

“We also like how Apple is leveraging its loyal installed base of (more than) 1.3 billion active users to sell more high-margin Services,” Pelayo wrote. Paid subscriptions jumped 30 million in the quarter and increased by 100 million from a year earlier, he added, citing record sales in the categories of apps, music, extended warranties, Apple Pay and iCloud.

Other analysts agreed. “Even if smartphone replacement cycles continue to lengthen, we see Apple delivering 4% revenue and 16% (earnings per share) growth over the next three years with services the primary growth engine,” Morgan Stanley’s Huberty wrote. She expects Apple will add a pay video offering soon, as has been widely rumored.

Apple’s wearables, which include AirPod earbuds and the Apple Watch, also grew strongly, according to CEO Cook, citing a 50% growth rate over last year and comparing the business to a “Fortune 300” company. Aluminum maker Alcoa ranked 300th on the Fortune 500 this year, with annual revenue of over $9 billion.

That encouraged fans of Apple stock, like Angelo Zino at CFRA Research, who has a price target of $195. “We still conservatively forecast no iPhone unit growth through FY 19 but see robust demand for other hardware offerings/wearables,” he noted.

Apple’s 16% dividend increase seemed low to HSBC analyst Pelayo, but Apple is emphasizing buying back stock, instead, he noted.

“The dividend was increased by 16%, which was below our expectation, but management was very clear in stating that they preferred to focus on stock buybacks as they perceived the shares as undervalued,” he wrote.