KeyBanc Expects 'Very Good' Q4 Print From Apple, But Predicts Coming Decline In Services, iPhone Revenue

Apple Inc. AAPL, the first company to enter the $1-trillion market cap club, has not elicited much enthusiasm from KeyBanc Capital Markets on the basis of the outlook for the company's iPhone and Services revenue beyond fiscal 2019.

The Analyst

Analyst Andy Hargreaves maintained a Sector Weight rating on Apple. 

The Thesis

Apple, which is scheduled to release fiscal fourth-quarter results after the close Nov. 1, is likely to report above-consensus revenue and gross margins in Q4 as well as in the first quarter of fiscal 2019 thanks to the strong initial mix of new iPhones with high storage, Hargreaves said in a Sunday note. (See his track record here.) 

The results will be driven by iPhone pricing strategy and initial demand, the analyst said.

This paradigm should drive consensus 2019 EPS estimates higher as Apple exits the Q4 print, he said. 

Yet Hargreaves forecast a deceleration in Services growth in 2019 as slower user growth, decelerating per-user monetization in the App Store and "anniversarying" Google traffic acquisition costs impact Services growth going forward.

The App Store model holds longer-term risk, as major service providers push back against Apple's fees and the company's ad efforts bring concerns of monopolization, the analyst said. 

Citing its early supply and demand checks, KeyBanc boosted its iPhone unit and ASP estimates for 2019, raising the unit estimate by 2 percent from 211 million to 216 million and the ASP estimate from $786 to $797.

"We expect very good near-term results, but our expectation for decelerating Services revenue and declining iPhone revenue in the [2020] cycle prevents a more positive view of the shares," Hargreaves said. 

KeyBanc's fair value estimate for Apple's shares is at $209.

The Price Action

Apple shares have gained about 31 percent year-to-date. The stock was trading up 0.79 percent at $221.04 at the time of publication Monday. 

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Photo courtesy of Apple.