Saturday, September 30, 2017 -- In the days leading up to Apple's Fiscal Q3 earnings report released on August 1, 2017, the stock plummeted from a high of $153.38 to a low of $146.72 on concerns that the iPhone X was running into production issues and might be delayed until fiscal Q1. Normally, Apple launches its new iPhones during the last week of fiscal Q4 every year. And each year analysts bake those launch week iPhone sales numbers into their expectations. This year, for example, analysts were expecting Apple to guide fiscal Q4 revenues to $50.48 billion on the assumption that the 10-year anniversary iPhone would launch during that typical last week of September.
Yet, some analysts began cutting their estimates and tapered back expectations for Apple's fiscal Q4 revenue guidance based on reports that the iPhone X would be delayed. If the iPhone X (called the iPhone 8 at the time), was to be delayed, then surely Apple's revenue guidance would take a significant hit right? If Apple is unable to launch its new flagship 10-year anniversary iPhone before the close of fiscal Q4, it would cause everyone looking to upgrade to the iPhone X to delay purchasing the device until Apple's fiscal Q1. The numbers would essentially be pushed from fiscal Q4 to fiscal Q1. In the grand scheme of things, it might not mean much, but it could have a major impact on Apple's fiscal Q4 revenues which in turn could dramatically impact the overall sentiment for the stock.
Long-time seasoned Apple analyst Toni Sacconaghi from Bernstein Research Group sent a note to clients around Tuesday, July 25 stating major concerns about Apple possibly delivering a massive miss on revenue guidance due to a delay in the iPhone X (again it was called iPhone 8 at the time):
While the street appears to be increasingly factoring in a delay for iPhone 8 and weak Q4 guidance, we note that only about 1/5 of analysts have lowered numbers for Q4, and we see the possibility that Apple could guide Q4 revenues $6B – $10B below cons estimates (we are at $42.7B vs. $50.4B), if there are delays with iPhone 8, which appears increasingly likely. We also encourage investors to monitor GM guidance, given the continued rise in NAND prices during the quarter and potential for a negative mix shift if the flagship iPhone 8 is delayed.
So will (potentially very) weak Q4 guidance matter? In our opinion, no – *unless* iPhone 8’s availability is pushed out past early November, in which case we believe that Apple could see incremental switchers away from iPhone, potentially undermining FY 18 numbers. A key question is what Apple might say on its conference call in the face of weak guidance.
As you can see, Toni Sacconaghi's revenue expectations for fiscal Q4 was at $42.7 billion on the expectation that the 10-year anniversary iPhone would be delayed to as late as early November. Now Toni Sacconaghi was right. The iPhone X was delayed until November or fiscal Q1. But where he was wrong is in his expectations that Apple's revenues would suffer to the tune of $8-$10 billion as a result. Now it's important to note that Toni Sacconaghi was referring to the 10-year anniversary iPhone X here as the iPhone 8. There were no rumors of delays for the "regular" less exciting iPhone 8. All of the rumors of delays were regarding Apple's iPhone X. And that's what Sacconaghi and many on Wall Street began to suspect might be delayed.
Now when Apple delivered its fiscal Q4 guidance on August 1, the stock absolutely skyrocketed from $149.50 up to $160 a share. That is a 7% surge in the stock price on otherwise typical earnings out of Apple. There was nothing special about this earnings report that in any way separated it from any other past earnings report. The beat on Q3 revenue and earnings was fairly typical, and guidance came in a little stronger than the consensus which was also typical.
But the stock skyrocked because of what Apple's revenue guidance meant for the iPhone X. Wall Street interpreted Apple's strong guidance as an indication that the iPhone X was not delayed but would be delivered on schedule by the end of fiscal Q4 during the typical launch date of Friday, September 22. That is exactly how investors interpreted Apple's fiscal Q4 revenue guidance. After Apple delivered its fiscal Q4 revenue guidance, CNBC's headline read "Apple surges 5% to record after forecast shows Wall Street fears over iPhone delay were 'overblown.'" The article opens up by stating:
Several Wall Street firms told their clients in recent months they were worried Apple could delay the release of the next iPhone.
But analysts are now saying the concerns were overstated after the smartphone maker gave a better-than-expected financial forecast for the September quarter during its earnings report Tuesday. Apple shares opened up 6 percent Wednesday morning to a new all-time high. The stock closed up 5 percent at the market close.
"The outlook implies that fears of an iPhone X launch delay, and/or limited availability of the device, may have been overblown," Piper Jaffray analyst Michael Olson wrote Wednesday in a note to clients. "We recommend owning AAPL due to growing anticipation around iPhone X and a favorable trajectory for services revenue." Olson reaffirmed his overweight rating and raised his price target for Apple to $190 from $158, representing 27 percent upside from Tuesday's close.
The tech giant reported strong fiscal third-quarter earnings Tuesday. Its sales guidance for the next quarter also came in above expectations at between $49 billion and $52 billion versus the $49.2 billion Thomson Reuters analyst consensus.
The article then goes on to state how Katy Huberty of Morgan Stanley and Rod Hall of JP Morgan raised both iPhone estimates and price-targets based on the fact that Apple's Q4 revenue guidance unequivocally proves that the iPhone X would not be delayed. The analysts go on to mention that the stock has rebounded back to pre-iPhone delay price levels as Wall Street prices-in that the iPhone X would be released on time.
Now let's consider the implications of all of this. Either Apple delivered its Q4 guidance knowing the iPhone X would not be launched on September 22 or it reported fiscal Q4 revenue guidance before it realized that it would have to delay they iPhone X. I believe its fairly clear that when Apple had delivered its fiscal Q4 guidance on August 1, 2017, it already knew the iPhone X would not be shipping on September 22. I believe Apple's guidance only reflected what the company believed it would be able to deliver on iPhone 8 sales alone. So that $49-$52 billion revenue guidance that Wall Street originally thought included the iPhone X, was really based only on the strength of iPhone 8 sales alone.
Think about how bullish that is for a moment. It means that Apple's management believes that iPhone 8 sales alone would be so incredibly explosive as to be able to help Apple deliver $49-$52 billion in revenue in Q4 without the help of the iPhone X. Not a solitary analyst expected that Apple would be able to pull off such a feat with just the iPhone 8. Toni Sacconaghi expected revenue guidance to come in a full $8-$10 billion below the consensus specifically because he believed the "regular" iPhone 8 would be unable to help Apple deliver $49-$52 billion in revenues.
What this all means is that iPhone 8 sales are actually far STRONGER than analyst expectations going into fiscal Q3 earnings. They are far stronger than anyone could have ever expected.
Apple has fallen $15.78 from a peak of $164.94 to a low of $149.16 partly on reports of weak initial iPhone 8 sales. That is a drop of 9.57% partially due to the short-term memories of some analysts and investors. On Monday, September 25, Apple hit its monthly low of $149.16 -- we bought in at $149.50 -- on a Citi Research report stating that iPhone 8 sales will fall short of expectations. CNBC reported the following:
Citi Research lowered its earnings and sales estimates for Apple's September quarter, predicting lower-than-expected demand for the iPhone 8 will cause the company to miss the Wall Street consensus.
"We are reducing our F4Q17 (Sept) to reflect more modest iPhone 8 and 8 Plus demand. Checks in US/Europe indicated similar demand patterns to those observed in Asia and Australia … i.e. modest crowds but definitely thinner than in the past while ship times for the devices ordered online were also quicker," analyst Jim Suva wrote in a note to clients Monday.
"We are not surprised that current ship times are quicker and lines shorter than prior launches, as we believe users will wait to compare to iPhone X before making a final purchase."
The entire basis of Citi's "research report" is that thinner lines and quicker ship times suggests the iPhone 8 is weaker than expected. Are you kidding me? People still look at line sizes to gauge demand? Setting aside the incredibly laughable sample size underlying the report, for all we know, quicker ship times could be due to efficiency. The iPhone 8 is now the fourth iteration of largely the same form factor device. Apple was incredibly efficient with selling the iPhone 7 because the phone was largely the same as the iPhone 6 and 6s. The iPhone 8 is also largely the same form factor.
And before anyone jumps to the conclusion that Apple could be wrong about the iPhone 8, it should go without saying that Apple is by far in the best position to be able to make judgment calls and forecasts regarding the expected strength of its products. Apple is working off of far superior information and a greater degree of research points than all other outsiders put together. This is why Apple is able to forecast its revenues with such high precision. It's because Apple is working off of incredibly strong information. So when Apple guides revenues to $49-$52 billion because it believes iPhone 8 sales will carry the day, you better believe that iPhone 8 sales will carry the day. Apple's management is very rarely wrong about these things and when they are wrong, we're talking by a hair.
The point is this. Don't get too caught up in this nonsense about iPhone 8 sales being weak because some analyst checked lines and ship times. The fact of the matter is that Citi and other analysts are working with far too small of a sample size to draw any sort of reasonable conclusion one way or the other. They are certainly not working off of the type of sample size necessary to forecast with precision like Apple's management does. What's more, you get conflicting information from different analysts working off of the same information. This is all short-term stock driven nonsense.
Just yesterday (Sep. 27), CNBC published a headline entitled "Reports of weak iPhone 8 sales are 'excessively negative,' KGI says." The stock first falls on Citi news and then rises on KGI. What changed in two days?
Getting back on the point at hand. Going into Apple's fiscal Q3 earnings report, virtually every analyst and investor was working off of the assumption that Apple's revenue forecast of $49-$52 billion for Q4 included sales of the iPhone X. But as Apple has pointed out during its September 12 keynote, the iPhone X will not ship until November. Think about how bullish that $49-$52 billion revenue forecast is next time an analyst publishes a research report suggesting that iPhone 8 sales are weak. Toni Sacconaghi himself initially expected $8-$10 billion less in revenues due to the delay in iPhone X. If Apple is able to pull off a $52 billion revenue quarter without the help of the iPhone X launch sales numbers, imagine what Q1 revenue guidance is going to look like.