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Apple Bull Weighs Impact Of Taiwan Semiconductor Guidance Cut, Battery Replacement

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Apple Bull Weighs Impact Of Taiwan Semiconductor Guidance Cut, Battery Replacement
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Semiconductor foundry Taiwan Semiconductor Mfg. Co. Ltd. (NYSE: TSM) recently warned of a revenue shortfall for its March quarter, and RBC Capital Markets looked into the implications for beleaguered Apple Inc. (NASDAQ: AAPL).

The Analyst

Analyst Amit Daryanani maintained an Outperform rating on Apple shares with a $185 price target.

The Thesis

TSMC, which supplies processors for iPhones, guided to a 22-percent quarter-over-quarter decline and a 13-14-percent year-over-year drop in Q1 revenue to a range of $7.3 billion to $7.4 billion, Daryanani said in a Thursday note.

Apple sold about 11 million iPhone batteries in 2018, notably ahead of the 1-2 million that were expected. The bulk of the battery replacement took place in the December quarter after the new phone lineup was launched, the analyst said.  

Normalization of battery replacement costs ahead of the new phone launch could benefit the new cycle as comps ease, Daryanani said. 

Reports of slower hiring at Apple, if true, are a prudent move, he said. That said, the analyst expects Apple's R&D spending to continue to grow.

"We think iPhone weakness would have to persist for several quarters before we see notable cost reduction measures." 

Investors may be bracing for March quarter EPS of $11.50-$12, according to RBC Capital Markets. 

With Apple's decision to reclassify revenues across hardware and services categories, the company will now be adding $2.56 billion to services revenues to reflect the deferred value of Maps, Siri and free iCloud services, which were previously bundled with product sales, Daryanani said. 

This will reduce revenue across the hardware categories by an equivalent amount, the analyst said. 

Even as investors wait for more clarity from the March quarter results, RBC said Apple's risk-reward profile is attractive. 

The Price Action

Apple shares were trading up by more than 1 percent at $157.47 at the time of publication Friday, while Taiwan Semiconductor was up nearly 1 percent at $36.65. 

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Photo courtesy of Apple. 

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Jan 2019Bank of AmericaReiteratesNeutralNeutral
Jan 2019CitigroupReiteratesBuyBuy
Jan 2019Morgan StanleyMaintainsOverweightOverweight

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