Apple Likely To Miss The Next 2 Quarters

| About: Apple Inc. (AAPL)
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Summary

As with my previous article, there are enough reasons to believe Apple will have to guide down growth further.

This applies to the next two quarters.

The reasons are evident and unavoidable. The lower revised growth is particularly likely for Q4 FY2017.

Interim competition will be a problem, but not the only problem.

A couple of weeks ago I published an article on Apple (NASDAQ:AAPL) titled "Apple To Guide Revenue Growth Lower." In that article I explained why Apple was likely to guide Q3 FY2017 revenue growth lower from the then-existing 7.6% year-on-year growth consensus.

With Apple's Q2 FY2017 report, such has already come to pass. The high end of Apple's revenue guidance for Q3 FY2017 was below the market revenue growth rate consensus, and as a result revenue estimates had to be guided lower. The new estimate for Q3 FY2017 thus came down to 6% from 7.6%, as we can see below:

Source: Yahoo Finance

However, this time I'm going to go one further. I'm going to say Apple will possibly miss this lower consensus and (even more likely) also guide down for Q4 FY2017. The reasons are pretty simple and might even extend to Apple guiding down EPS for Q4 FY2017, on top of guiding down growth expectations. So here we go.

The iPhone

Already during Q2 FY2017, Apple saw iPhone volumes dropping year-on-year, even though revenues held better:

Now, J.M. Manness argues that iPhone shipments were up year-on-year if we correct for channel inventory drawdown. But, remember:

  • The base year did not include the iPhone SE.
  • The channel drawdown probably actually portends what comes next.

So what comes next? Something which is obvious is that the iPhone SE will be on the base year, so ceteris paribus (everything else being equal), year-on-year iPhone volume comparisons will worsen come Q3 FY2017. That is, where you saw -1% during Q2 FY2017, a worse number will sit in Q3 FY2017.

Of course, that was already the basis for me saying that Apple would guide down for Q3 FY2017. But it gets worse. There are a further three effects will add to the iPhone SE effect, and thus make even the revised consensus be too aggressive. These are:

iPhone 8 Anticipation

Little by little, the general public is learning that a big change is coming to iPhone design after a full three years living with about the same design. This argues for a larger than usual reduction in iPhone sales going into the customary September launch.

However, the consensus still incorporates regular trends (observe the 13.3% sequential growth expected from Q3 FY2017 to Q4 FY2017 vs. the 10.6% change seen during FY2016). As a result, a larger than usual anticipation for the new iPhone model will play chaos with "business as usual" expectations.

Samsung S8

The Samsung S8 is an incredible device to hold in the hand and improves upon a large design advantage the Samsung S7 Edge already held over the iPhone. It will provide increased competition for the currently selling iPhones between now and the iPhone 8 launch. It also will somewhat mitigate the negative effect from the Note 7 blunder, which slightly favored the current iPhone generation.

The result is, again, increased pressure on Q3 FY2017 and Q4 FY2017 Apple revenues (and revenue growth).

The iPhone 8 Schedule

From product leaks alone (as well as continued rumors), we know that the iPhone 8 is not ready and won't launch on the regular "new iPhone" schedule. It is, however, very likely that the device itself will be unveiled on the regular schedule (September).

So what will happen in September? Apple will unveil the iPhone 7s, which will share design with the current iPhone 7 while getting upgraded internals and it will also unveil the iPhone 8 - which will look massively new. Then Apple will start delivering the iPhone 7s during September, so already adding up sales to Q4 FY2017, but it won't start shipping the iPhone 8 in time to make it into Q4 FY2017.

As a result, the consumer will be able to buy the seemingly outdated iPhone 7s during Q4 FY2017, but it won't be having access to the "new" iPhone during Q4 FY2017. This, in turn, will compare to the "new" iPhone 7 launch during FY2017. The comparison, unless the iPhone 7s hits stores much sooner than usual, will obviously be unfavorable.

This, adding to the previous two effects, means that Q4 FY2017 revenue growth expectations - which now sit at 8.6% - aren't likely to be met (and will probably also be guided down ahead of time, when Apple reports Q3 FY2017).

Conclusion

From the effects above, over the next five months Apple will:

  • (Likely) lail to meet current growth expectations for Q3 FY2017.
  • (Highly likely) fail to meet current growth expectations for Q4 FY2017 or severely guide down Q4 FY2017 expectations when it reports Q3 FY2017.

Of course, with the iPhone being critical for Apple's profitability, it's also likely that EPS, at least for Q4 FY2017, will have to be revised lower. Furthermore, component costs (DRAM and NAND) have climbed significantly and also pose an EPS headwind.

As with my previous article, though, I'm going to add a qualifier here. These are projections for what's likely to happen to Apple's revenue growth. These are very likely to happen. However, this doesn't mean Apple stock will necessarily react negatively when it reports earnings or revises growth lower. Apple is trading mostly on iPhone 8 anticipation and can thus ignore both EPS reports and guidance. This anticipation, though, also creates a possible "buy the rumor, sell the news" effect for when Apple finally unveils the iPhone 8.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.