JPMorgan Is Not Looking Forward To Today's Apple Earnings

While hardly any analysts or traders expect Apple to report blockbuster earnings today on the back of slowing smartphone sales, challenging iPhone 7 adoption, rising competition in China, and generally a loss of Apple's trademark creative spark under the "new management" which is far more interested in stock buybacks and M&A, few are as skeptical as JPM's Rod Hall who, following last week's downgrade by Barclays, came this close to losing his faith in the world's largest company (he still has an Overweight rating... of course).

This is what he said to expect in today's AAPL earnings:

Expecting a weak iPhone unit guide with variability from ASPs, FX and Airpods

We believe guidance for FQ2 to March is likely to be lower than many expect on weaker iPhone unit volume. ASPs could partially offset this but the negative FX impact is probably enough to make the two effects a wash. Airpods, however, could add a little kick as the tiny things are nearly impossible to find with leadtimes at 6 weeks globally. At the current share price we doubt Apple deals with short term hiccups well.

Having said that we believe the stock remains a strong value opportunity assuming the board will eventually pay a higher dividend. We also buy into the consensus view that the iPhone cycle should be better this year.

  • Higher Plus version mix could boost ASPs: Our supply chain checks indicate that the mix of the Plus version could be 45% - 50%, higher than our previous estimate of ~40%. A 10% increase in Plus version mix would result in an ASP boost of ~1.4%, as shown in the sensitivity analysis in Table 2.
  • FX headwind. We estimate that the US dollar strengthening since the last earnings could drive a ~1.5% negative impact to revenues, as shown in Table 3.
  • iPhone 7+ lead times better: In the top 10 iPhone countries, iPhone 7+ lead times improved materially in December as production caught up with demand. We don’t believe that the iPhone 7 saw any material supply shortages during the quarter. Overall, we believe that iPhone demand is progressing more or less in line with our below-consensus forecasts.
  • AirPods positive: According to Slice Intelligence, AirPods have taken ~26% share of the wireless headsets market since their availability on Dec 13. The lead time remains high at ~6weeks globally even though we suspect Apple has been increasing production. We estimate that every ~1m AirPods shipped in a quarter would result in a positive EPS impact of ~0.4%, as shown in Table 4. At a maximum we believe that the good Airpod momentum may have boosted EPS by ~1% in FQ1.
  • Share repurchases could be stronger than expected: Apple’s outstanding share count declined by 74m between Oct 14 and Dec 30. This decline is materially better than the 31m decline we saw in almost the same time frame last year. We are currently assuming only $7.5bn in repurchases (+9% Y/Y) in our model. Given the stronger decline in outstanding shares and flat average share price Y/Y in Q4, we wouldn’t be surprised to see better than expected buybacks in FQ1.
  • App revenue continued growth: On Jan 5, Apple announced that the App Store recorded New Year’s Day as its busiest single day ever, following a record-breaking holiday season. Apple said in 2016 developers earned over $20bn, up over 40% from 2015. Based on Apple’s app developer revenue disclosure, we estimate that iOS App revenue for Apple grew by ~29% Y/Y in CH2’16, following 58% Y/Y growth in CH1’16.
  • FQ1’17 Estimates/Guidance: We forecast revenue of $76.9bn (consensus $77.4bn, guidance $76bn - $78bn), GAAP gross margin of 38.3% (consensus 38.4%, guidance 38.0% - 38.5%), GAAP EBIT margin of 29.3% (consensus 29.4%) and GAAP EPS of $3.20 (consensus $3.22).

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Will JPM's harsh pessimism be accurate? For the results tune in at 4:30pm.