Increased competition among U.S. carriers and an underrated supply chain for the iPhone might help Apple (NASDAQ: AAPL) beat lowered expectations over the next several months, according to a new research note from Wells Fargo Securities.
But that didn't stop Wells Fargo from ratcheting down its forecast for Apple's earnings for 2016.
Like many of its rivals, Apple is unquestionably struggling in a worldwide market where penetration rates are plateauing and upgrade cycles continue to lengthen. The company shipped a total of 51.2 million iPhones during the first quarter of 2016, down from the 61.2 million it shipped during the year-prior period. And its revenues fell year-over-year in the first quarter for the first time since 2003.
But in a note to investors distributed in advance of Apple's quarterly earnings report due next week, Senior Analyst Maynard Um and associates cited several additional reasons the iPhone vendor's short-term future might be brighter than some believe.
"Our sense is that sentiment on Apple is at one of the lowest (points), if not the lowest (point), it's been since we've been covering the company," Um wrote. "In our view, it seems practically a given by investors that the iPhone 7 will see a very tepid response due to limited form factor changes and an expectation for a more material change coming in calendar 2017 with the iPhone 8/7s."
Most carriers were still only beginning to transition away from contracts and toward equipment installment plans (EIPs) two years ago, Um noted. It stands to reason, then, that many users who bought new handsets a couple of years ago are completing their contracts. And operators may move aggressively to promote the next iPhone and other new handsets to keep those customers from switching carriers.
"With what we believe to be one of the lowest periods of investor sentiment, we believe any positive data points (such as supply chain) could rally Apple shares, particularly if our analysis and premise about iPhone 7 units are correct (we believe carriers will want to limit churn of the large base of subscribers coming off contract)," according to Wells Fargo. "While investors are concerned that the lack of major form factor change will result in soft sales, we note that carriers have a major hand in smartphone demand. Our premise is that carriers will look to limit churn of the large number of subscribers that are coming off contract and note that only 8 percent of Verizon's subscriber base on EIP in Q4 2014 and 27 percent of AT&T's."
Still, Wells Fargo lowered Apple's earnings per share for 2016 to $8.24, down from $8.32 in its previous guidance, in what appeared to be an acknowledgement of a brutal worldwide smartphone market. Wells Fargo retained its "market weight" designation for Apple shares but lowered its valuation range to $115 to $125, down from $120 to $130. Apple shares closed Monday's trading session up 1 percent at $99.83.
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