Some on the Street today were pondering whether estimates for Apple (AAPL) for the June-ending fiscal Q3 are too high following the company’s Q1 report last Wednesday, at which time it introduced a new style of quarterly forecasting.
Consensus for that June quarter stands at $41.05 billion in revenue and $9.81 per share in profit. That is down from a prior estimate of $44.16 billion and $11.32 before the report.
As I mentioned this morning, R.W. Baird‘s William Power cut his rating on the shares to Neutral from Buy, and cut his price target to $465 from $570, writing that “With estimates likely to fall further and gross margin concerns likely to linger, we believe the shares could drop further, despite the sharp sell-off and valuation.”
Rather than the current quarter, Power thinks the June quarter is the “bigger concern.” He’s forecasting $36.2 billion in revenue and $8.53 per share. Power thinks either the Street is modeling too great a number for iPhone shipments, or else they’re counting on a refresh of theiPad prior to June that he hasn’t yet included in his model:
Current FQ3 consensus forecasts call for just a 4.9% sequential decline in revenue from FQ2 to FQ3, whereas we forecast a 13.4% sequential decline. We forecast FQ2 revenue of $41.8 billion dropping to $36.2 billion in FQ3, with consensus calling for FQ2 revenue of $43.3 billion dropping to $41.2 billion. We surmise the Street may be assuming a smaller decline in iPhone sales. We currently forecast iPhone shipments dropping from 35.4 million in FQ2 to 29.0 million in FQ3, whereas the Street appears to be forecasting iPhone shipments in the low 30 million range as best we can tell. One other possible explanation for the FQ3 discrepancy is that we are not currently modeling an iPad refresh in the June quarter, which has been customary over the past couple of years, due to the fact that the iPad line was just refreshed in the fall. For argument sake, if we added another 5 million iPads to FQ3 our forecast, that would add roughly $2 billion to our revenue forecast, still below consensus by a fair margin. A launch at China Mobile or new product would also be additive to our current forecasts.
Likewise, Toni Sacconaghi withBernstein Research, who maintains an Outperform rating on the stock, and a $725 price target, writes that 2H estimates (particularly for the June quarter, FY Q3) appear too high” and that “consensus is forecasting a 1% sequential decline in iPhones in FY Q3, which is historically unprecedented in the absence of a new device � which we would not hold our breath for (at least at this point).”
Sacconaghi models Q3 revenue of $35.7 billion and EPS of $8.52. Like Power, he thinks the Street is perhaps betting too hard on new product introductions prior to June:
Yes, a new iPhone introduction in the month of June could possibly result in consensus expectations for the quarter being reasonable, but (1) the new iPhone had better launch early in June (our forecast is about 8M units below consensus, and assumes a new iPhone launch in the Sept qtr); and (2) we will not know for certain about the timing of such a device until May at the earliest� meaning that there is going to be significant uncertainty throughout this quarter and until Apple reports in April about whether Q3 estimates are realistic/low enough. – We believe other new products (new iPad, TV set) or a major carrier addition (China Mobile (CHL)) are not enough to bridge the gap in consensus’s Q3 estimates. It is possible that consensus is modeling major carrier additions and a low priced iPhone, but betting on the specific timing of one or both is risky.
Sacconaghi also is wary of the new form of forecasting:
In essence, Apple executives were saying, “we are no longer going to provide low-ball guidance that we are going to crush; this guidance range is realistic, get in line”, which sell-siders largely did, albeit at the high end of the range [...] Perhaps Apple’s approach to its new guidance should have included estimates for the full FY � because to us, the specter of further downward revisions could continue to spook investors in the near term.
Apple shares today rose $9.95, or 2.3%, to close at $449.83. The stock is up another $1.67, or 0.4%, at $451.50 in late trading.
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