Apple Is Facing An 'Off' Year In 2017

Maynard Um of Wells Fargo sees Apple Inc. AAPL reporting earnings and sales above Street when it reports after market close.

Um projects revenue and EPS of $47.6 billion and $1.71, above the Street's $47 billion/$1.65, driven by an accelerated iPhone country launch.

“Our sense is that sentiment is as positive as it had been into the iPhone 6 cycle and thus believe Apple has a low margin of error in delivering results and guidance,” Um wrote in a note.

The analyst sees gross margins of 38.2 percent on lower inventory and less channel price protection from the prior quarter.

For the first quarter, the analyst forecast revenue and EPS of $75.5 billion and $3.25 on 77 million iPhone sales, above the Street's estimate of $74.7 billion/$3.20 on 76 million iPhone sales.

Related Link: Apple iPhone 7 Plus Outsells The 7, 2:1

Meanwhile, investors should focus on gross margin outlook as the recurring revenue bull-case is based on the stability of gross margin stability. 

“We expect December gross margin guide to be up sequentially given the greater mix of iPhone in the quarter though greater promotional activity could offset and expect management to talk about iPhone demand outstripping supply,” Um highlighted.

Um anticipates December quarter gross margin of 39.4 percent  assuming an increase in the mix of iPhones.

The analyst maintained Market Perform rating on balanced risk/reward.

“We believe near term positives of 1) 14th week in the December qtr, 2) yr/yr growth in the March qtr (impacted by excess inventory in the prior year), and 3) stable gross margins are likely embedded into shares and see risk/reward as balanced,” Um added.

Notably, Um sees “risk of demand pull-in from the March quarter, and think next year's “off” cycle could result in demand headwinds (absent promotional activity, which would adversely impact gross margins).”

The analyst has a valuation range of $105 to $120.