In an unexpected breach from the herd of sellside optimism, this morning Barclays downgraded Apple to Equal Weight from Overweight, putting some pressure on the stock which was down modestly in the premarket. This is what Barclays said to justify its contrarian view on the world’s largest company.
* * *
Downgrade to Equal Weight– No Growth Rebound or Needle Movers
We are downgrading Apple to Equal Weight and lower our price target to $117 from $119. This call is not on the quarter. Despite easier comps approaching, we do not expect meaningful upside potential in the model and thereby consensus estimates for C2017, limiting the stock’s relative outperformance potential – hence, the downgrade. Apple has a sticky ecosystem and large cash balance, though, providing decent downside support for long-term investors.
Growth rebound could be elusive. Our chief concern is that investors increasingly are hoping for a meaningful exit rate (i.e., 10%-plus Y/Y unit growth) led by the iPhone 8 cycle in 2H C2017. Our view is that customers increasingly mixing down (IP6S in favor of IP7) and maturation of the device-centric consumer electronics adoption wave could weigh on both Apple and the smartphone market. We also are concerned about China and India not emerging as growth catalysts in the next 12 months.
Smartphone blues continue. Concurrently, we are lowering our Barclays Global Smartphone market forecast. In our view, the directional movement in the market outlook creates a wider chasm to achieving 10%-plus Y/Y growth exiting C2017 in iPhone units, which could keep Apple’s model and stock range-bound.
Revisions recap. Our revised C2017 global smartphone market revenue and unit growth estimates are for a decline of -0.4% and growth of +5.5%, vs. +4.4% and +7.8% previously. Meanwhile, our revised C2017 total iPhone revenue and unit growth estimates are 4.5% and 3.4%, vs. 7.0% and 5.9% previously. These profiles, if extended to year end, are not likely to expand Apple’s stock valuation multiples, in our view.
The next harvest requires some patience. Long-term growth opportunities related to India, services, the enterprise, artificial intelligence, and maybe even the Cloud still exist; however, we do not expect these potential “what’s next?” opportunities to emerge as major needle movers over the next 12 months for Apple’s model.