Morgan Stanley Cuts Apple 2016 iPhone Estimates By 12%, But Why?

• Shares of Apple Inc AAPL have been volatile in 2015 and are up 2.5 percent year-to-date.
• Morgan Stanley’s Katy L. Huberty maintained an Overweight rating on the company, with a price target of $143.
• Although iPhone demand is expected to be weak in the current cycle, the impact could be offset by the launch of iPhone 7 and of new products like Apple Watch, Huberty stated.

While Apple is expected to suffer reduced revenues and gross margins due to weak iPhone unit sales in the current cycle, it is poised for robust growth given the launch of newer products and services, analyst Katy Huberty mentioned.

Higher price in international markets, excluding China, and maturing smartphone penetration in developed markets are expected to weigh on iPhone upgrades and new user growth in the near future, Huberty said.

The estimate for Apple’s December quarter iPhone shipments has been reduced from 79 million units to $75 million units and that for the March quarter has been lowered from 61 million units to 52 million units.

“We lower FY16 iPhone units by 12% and EPS by 6% to reflect weak smart phone supply chain data points,” the Morgan Stanley report noted.

Huberty expects Apple’s iPhone unit sales to return to growth in September, as the large base of new users added during the iPhone 6 cycle begins to upgrade. The company may also benefit from the launch of its new iPhone model.

Apple’s growth is also expected to be driven by new products and services, including the Apple Watch, Apple Music and partnerships such as HealthKit, HomeKit and CarPlay. Huberty also believes that the recent additions to the management team will help expand Apple’s leadership in key areas like retail, design, health, digital content and autos.