Home / iPhone / Apple – Buy Now Despite The iPhone X Shipment Timing? – Seeking Alpha

Apple – Buy Now Despite The iPhone X Shipment Timing? – Seeking Alpha

There is a news this morning that is contributing to some Apple (NASDAQ:AAPL) share weakness this morning. It is that there is a bug in the new Apple Watch – Series 3 that has the watch responding to weak but unknown Wi-Fi signals when it should be operating on a cellular connection. It is meant to operate on Wf-Fi as a first priority like when at home or office and that network is known – and then revert to cellular when roaming elsewhere. But there are many Wi-Fi networks around and weak signals from them that the watch detects are confusing it in some cases. This has surfaced because reviewers now have early copies of the watch which does not deliver to customers until this Friday, September 22nd or later. Delivery times are currently quoted at 2-3+ weeks but stores may have some stock on Friday.

We suspect Apple will be able to create a software fix for this bug and will announce it soon – hopefully before Friday. If so, it should be able to provide it to watch owners over the air in real-time. We suggest taking advantage of today’s share price weakness or preparing to when the fix is announced given the positive case we make for the shares in this article.

THE OPTIMISTIC CASE:

With last week’s new product announcements revealed and some days to appraise them, it is time to develop and present to you the optimistic but realistic case for Apple shares so that we do not miss out on the benefit of what could occur to drive Apple significantly higher over the next 12-15 months.

We pick this time frame to include next fall’s major new iPhone and other product announcements that should be much less constrained by the limited availability of new components to allow them to be extended to much more of Apple’s product lines.

The new iPhone X shows what can be expected to be added to many, most or nearly all Apple products over this next year. Recall, the new iPhone X features include:

  • Edge-to-edge Super Retina 5.8” OLED display that gives it a larger surface than the 5.5” iPhone 7 Plus or 8 Plus display with a device close to the physical size of the iPhone 7 or * with their 4.7” displays.
  • Unlocking with “Face ID” facial recognition that replaces the fingerprint ID unlocking on the previous iPhones.
  • OLED displays and Face ID were apparently the two most challenging technologies in the iPhone X. As costs and OLED screen available volumes increase they will be added to other iPhones, iPads and even Mac computers.
  • “True Depth” camera system to enable Augmented Reality (AR) features and apps and “Animojis” that enables SNAP-like overpaying of digital images onto views of the real world.
  • Battery life 2 hours longer than that of the iPhone 7, enabled by the OLED display and new semiconductors that draw less power.
  • Wireless charging – the new iPhone 8 and Apple Watch get this too.
  • Sometime next year, faster charging will be launched.

The iPhone X will be available for pre-ordering October 27th for delivery November 3rd. This means it will have no sales in Apple’s September FQ4 and limited sales in the seasonally strong FQ1. That it would not be available until October or November does not come as a surprise to us given all the indications over the last 6+ months of technical challenges that limited the near-term OLED display and Face ID-enabling component volumes.

With the limited availability of iPhone X units, the iPhone 7 and 8 must sell reasonably well to help carry the company’s overall sales in FQ1. Indications already are that many buyers will wait for the iPhone X and iPhone 8 sales will be less robust than for the top models in recent years right after launch – because they are not the next highly desirable high-end models. The carriers are beginning to address this with promotional deals on the iPhone 8.

Chronologically, here is where the optimistic but realistic case could kick in. If the company and its suppliers can now steeply ramp iPhone X component production, shipment rates by December could be better than expected and could be very strong in FQ2 and FQ3. The recent AVGO management’s comments on their August 24th FQ3 earnings call suggested as much. Here is what AVGO management said about their AAPL (large North American customer) business on that call:

Moving on to the Wireless segment, in the third quarter, Wireless revenue was $1.3 billion, growing 12% sequentially and 27% year-on-year. The Wireless segment represented 29% of our total revenue. Third quarter Wireless growth was driven by the start of a ramp from our large North American smartphone customer as they started transitioning to their next-generation platform.

Revenue growth for us was further augmented by a large increase in Broadcom’s total dollar content in this new platform. Ramp of this new platform is now in full stride as we begin Q4 fiscal 2017. We expect this to drive very strong sequential growth in Wireless revenue for the fourth quarter and year-on-year would project strong growth in this segment as a result of our content gains.

As we also mentioned in our previous earnings call, our product shipments to support the rev this year of this North American smartphone maker were push out compared to prior years. As we look to the first quarter accordingly, our fiscal 2018. Unlike what occurred in the last two years, we presently expect Wireless revenue to hold up sequentially.”

The last paragraph of these comments by Broadcom management suggests they do not expect the normal seasonal sequential decline in shipments to Apple in their January FQ1 compared to their seasonally strong October FQ4.

Given AAPL’s excellent history of managing its high-quality range of suppliers and that it has been months since indications of which technologies the iPhone X would contain, we suggest there is very good reason for optimism for iPhone X volumes in FQ2 and beyond.

The limited availability of the Air Pods following their launch last fall showed us AAPL users are willing to wait a reasonable period of time for the products they desire as long as the wait is measured in weeks or a couple months – but not many months, so the window in which AAPL needs to perform with higher volume iPhone X production has its limits. The AVGO management comments tells us that high volumes of the iPhone X will be produced and delivered to customers in December and likely November as well to a significant extent.

The next reason for optimism is the Apple Watch – Series 3, and the excellent wearables solution it appears to offer, especially together with the AirPods, a smash hit product on their own that are still back ordered 1-2 weeks nearly a year after their launch. The big advance, of course, is the Watch being available in versions with cellular connectivity so that it does not require an iPhone to be nearby.

We think the watch paired with the wireless AirPods provides the first really compelling wearables solution. And that many apps will appear from AAPL and third parties to take advantage of that. One area in which AAPL is aggressively pushing forward is health and fitness and the Apple Watch has a number of advanced capabilities including improved heart rate monitoring and the ability to display abnormalities right on the watch in real time. There will also be many new sports apps available.

Also, the Watch + AirPods combo can play 40 million songs from Apple Music and with a 70% more powerful processor, Apple’s digital assistant Siri will be able to do considerably more on the standalone watch.

It would take a lot of incremental Watch and AirPods sales to be anywhere near as important as the iPhone to Apple’s revenues in FQ1 but if they are a hit holiday gift combo, get rave reviews as a hot wearables solution and there are exciting new killer apps launched, they could add significantly to the AAPL story and futures, and hence to the value of Apple shares in FQ1, even before the iPhone X production has fully scaled up to high volumes.

The other new offering coming from Apple in the December quarter is the HomePod smart home speaker system that will also be Siri-enabled. And can be used in pairs for even better audio quality. And in multiple rooms for more complete coverage. Its price is $349, which in typical Apple fashion is 2.6x the price of Amazon’s Echo at $130. But if many Apple buyers opt for several to have coverage in multiple rooms they could be spending $1000 or so – and that could make it a significant revenue source. Again, sooner in terms of driving the price of Apple shares than when its actual revenues become a major factor. Over the years, we have seen this occur many times with new Apple products that receive rave reviews, lots of exciting apps and strong initial sales.

The HomePod promises to have superior audio quality with a large woofer and with its A8 processor and 6 microphones to better deal with ambient sounds than the Alexa/Echo in the home while responding well to voice requests. At their early June developers event, Apple management provided developers with a HomeKit to ease HomePod app creation. As a result, we expect there to be many apps available at launch in December and then see the number and range of what they can do mushroom from there over coming months and quarters.

Key will be to watch over coming quarters will be what other consumer electronics and home appliance companies launch HomePod-compatible products. We expect it will be many because who would not want to be compatible with the power of Apple. Amazon has the lead currently, as reflected by the Sony launch last week of an Alexa/Echo interface for its TVs and Alexa already has more than 12,000 “skills”. But we anticipate most of the third parties will want to be compatible with both Apple and Amazon’s smart home standards and possibly Google’s as well. Much like with smartphone apps.

Also, our optimistic case has Apple integrating its HomePod with the new Apple TV 4K to provide an even more compelling smart home offering, all driven by Apple’s Siri service.

Like for the Watch-AirPod wearables offering, it would take a lot of incremental HomePod sales to be as important as the iPhone to Apple’s revenues, but if it is a hit holiday product and gets rave reviews as a hot offering, it could add significantly to the Apple story and futures, and hence to shareholder value. And that too would be highly valuable in the December quarter while the iPhone X production volumes are being scaled up.

Optimistically, we suggest that the HomePod and Watch-AirPod offerings are highly likely to combine with an iPhone X production ramp steep enough to provide fast enough delivery dates on pre-orders that only a real iPhone 8 demand disappointment would result in Apple shares not gaining nicely from here through calendar Year-end – and especially beyond. By December and perhaps November we expect the positive multiple watch, HomePod And iPhone X volumes news will drive Apple shares at least the $10 or 6%+ back to their $164+ high seen at the beginning of September.

As we move into calendar 2018, there should be a further strong ramp of iPhone X production and the launch of the device globally will benefit of the March and June quarters. And then as 2018 proceeds, indications will build that most or all of the iPhone X advances (including OLED displays) will be added to mid-range iPhones that will take the place currently held by the iPhone 8 and perhaps the iPhone 7. This provides an outlook that could propel Apple’s FY 2018 earnings nicely above the current $11.00 expectations and the annualized earnings rate as much as several dollars above that level by late in the calendar year, just 4-5 quarters from now.

$13-14 in earnings at a forward P/E of 14-16 would drive Apple’s share price to the wide range of $182-224, the midpoint of which is $203. This would represent a gain of 14-40% or 27% at the midpoint. This may be an optimistic view, but we suggest history will show that the new products this fall will represent one of the most major watershed events in Apple’s long history. And we say that with the perspective of having continually followed Apple from just after its December 1980 IPO when we were one of only three analysts following the PC industry and all three of us were with the company’s investment bankers. We have come a long way this world’s most valuable company.

There is more reason to be optimistic relative to Apple’s 2018 and beyond. With the scale-up of OLED display capacity over coming quarters, we cannot imagine Apple will not move its iPads and then Mac computers to OLED displays over the next 1-3 years. Recall, the “Super Retina” OLED displays on the iPhone X are superior to OLED displays on competitive devices. The first expectation would logically be that a next-generation iPad Pro would get Super Retina OLED displays by as early as next summer and be announced at the early 2018 WWDC18 developer’s event.

And just “One More Thing”: Like other highly innovative technology leaders, Apple did not get to where they are today without creating some things that no one anticipated in advance. So the potential for surprising and exciting additional new products over coming quarters and years is very real. And this comes in addition to the ever-expanding ecosystem of interacting products driving high customer loyalty – and services revenues which in the June quarter were up 22% YTY.

As stated above, we suggest using the current Apple share price correction to opportunistically add to or initiate positions or at least prepare to as soon as the fix is announced.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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