Outlook For Next Apple iPhone 'More Stable Than Feared,' PacCrest Says

In a report published Tuesday, Pacific Crest analyst Andy Hargreaves maintained a Sector Weight rating on Apple, Inc. AAPL. The analyst expects iPhone demand to be more stable than estimated through the refresh cycle during FQ4. Although there appears to be some softening in Apple Watch, the "more stable" outlook for iPhone brings down the risk of any significant downside to the stock. "Although it is early and we lack visibility into the critical December quarter, our initial estimates of iPhone component orders in FQ4 suggest Apple is anticipating demand in the next iPhone cycle that is ahead of our current expectations. A meaningful decline in F2016 iPhone unit sales has been our largest concern, so the slightly higher-than-expected initial order volume reduces risk to the shares, in our view," Hargreaves explained. The analyst also expects upside to the FQ3 estimates, given the continued strength in iPhone demand over the past several months. This, along with supplier checks, suggests that 50-52 million iPhone units are likely to be sold in FQ3, which would drive the EPS higher. "Our F2016 estimate could be at risk unless new compelling functionality is created. After strong initial demand, follow-on interest in Apple Watch appears mediocre. Our checks at suppliers suggest this may have driven a modest reduction in component order volume through September," the Pacific Crest report said. While Apple is likely to be able to meet the F2015 estimate, the analyst believes that the risk to the F2016 estimate seems to be rising. "However, iPhone drives profits at the company and we expect extremely high retention rates to continue supporting strong cash flow and buyback activity. This is likely to limit downside, which creates a slightly more positive risk/reward, in our view," Hargreaves added.