From China To Apple Watch Failures: What's Troubling Cowen's Arcuri

• Shares of Apple Inc. AAPL have been trending south in the last few months and are down 13 percent since October 27.
• Cowen’s Timothy Arcuri maintained a Market Perform rating for the company, with a price target of 125.
• Although the company reported better-than-expected F1Q results, the failure of Apple Watch and the demand reset in China remain concern areas.

Apple reported F1Q16 revenues and EPS of $75.9 billion and $3.28, respectively. The company sold 74.8 million iPhone units during the quarter, while the revenue/unit sale figures for Apple Watch were not disclosed. The company guided to F2Q16 revenues and EPS of $51.5 billion and $1.93, respectively.

Analyst Timothy Arcuri expects the company’s March quarter performance to represent the bottom, even after accounting for forex related headwinds.

“The good news is March guide is finally out of the way and numbers were not as bad as many investors feared (albeit well below Street). Additionally, the stock and forward P/E have been highly correlated to Y/Y compares and March should represent the bottom, even accounting for FX headwinds,” Arcuri wrote.

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He mentioned that the growing risk of China demand reset, the potential risk to iPhone unit sales and overall revenue growth at Apple remained the major concern areas.

Apple needs to look out for a new market after the demand reset in China. While India is likely to emerge as a strong market for Apple products, this may happen only by 2019 and India is at much lower price points than China, the analyst commented.

Although the installed base of iPhone users creates long-term service opportunities, investors generally do not pay any multiple for these businesses. “[W] hat we know about iPhone 7 is evolutionary, not revolutionary (OLED is the next innovation that we think allows AAPL to dream up new applications, but this is not until 2018),” the Cowen report noted.

Arcuri believes that the not-so-favorable response to Apple Watch is also likely to result in investors starting to question innovation. Apple Watch is unlikely to contribute more than 10 percent of the company’s total revenues before F2017.