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What's Wrong With Apple...And What Tim Cook Can Do To Fix It

What's Wrong With Apple...And What Tim Cook Can Do To Fix It
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Apple Inc. (NASDAQ: AAPL) shares are trading lower on Wednesday after a semi-disappointing earnings report. The company missed on revenue expectations and shipment consensus for all three major product categories, while issuing gross margin guidance below Wall Street expectations.

Jeff Johnston of Detwiler Fenton joined Benzinga's PreMarket Prep to discuss Apple and what investors should expect going forward. Johnston, who holds a $120 price target on the stock, explained that entering into 2016, his firm's biggest concern was March guidance. The December quarter -- reported this week -- could be solid, but March will reveal how much Apple's demand environment has softened.

This concern "played out" on Apple's latest conference call with management, Johnston warned. By focusing investor attention on currency headwinds, the company is "trying to change the narrative," but structural issues are present.

Related Link: Barclays Lowers Apple Price Target To $142, But 'Franchise Value Remains Intact'

In current smartphone cycle, Johnston said, upgrades to the iPhone are not as innovative as they once were. Screen size was a "lever" Apple pulled in the past, but it can't be repeated, leading to potential challenges for the next upgrade cycle, the iPhone 7. "With the headwinds that we talked about, you can see why the stock is trading [how it is] and investors are concerned," Johnston added.

What Could Apple Do With Its Cash?

On Apple's use of cash for potential M&A, the analyst said to "expect" acquisitions in 2016. A buyout of Harman, an idea that's been proposed by Jim Cramer in the past, makes sense "to get more exposure to automotive space."

A content rights acquisition could also help Apple "get into the living room in a more meaningful way," Johnston said.

What Tim Cook And Apple Could Be Missing

When asked if Tim Cook and Apple could be missing anything with its current strategy, Johnston had ideas.

If the company is really trying to monetize its customer base, it could make sense to "sacrifice margins" and offer a lower-cost phone to low-end consumers. The fear -- that it could hurt brand value -- is likely unwarranted, he added.

When asked what could be done from a shareholder standpoint, further dividend increases and buybacks would be sound moves.

Apple shares are near $94.50 on Wednesday morning.


Catch the rest of PreMarket Prep's interview with Jeff Johnston after the second break in the clip below, and listen to the show live every morning from 8-9:30 a.m. EST here.

Latest Ratings for AAPL

May 2018Morgan StanleyMaintainsOverweightOverweight
May 2018BMO CapitalMaintainsMarket PerformMarket Perform
May 2018Canaccord GenuityMaintainsBuyBuy

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