Sell-Side Analysts 'Gather Round' After Apple Unveils New iPhone, Watch

The pricing of Apple, Inc. AAPL’s new iPhones and the addition of heart monitoring features to the Apple Watch were among the areas sell-side analysts focused on after Wednesday's product rollout in Cupertino.

The Analysts

• Oppenheimer analyst Andrew Uerkwitz maintained a Perform rating on Apple. 
• KeyBanc Capital Markets analyst Andy Hargreaves maintained a Sector Weight rating.
• Raymond James analyst Chris Caso maintained a Market Perform rating.
• Wells Fargo analyst Aaron Rakers set a Market Perform rating with a $210 price target.
• Macquarie analyst Benjamin Schachter maintained an Outperform rating and raised the price target from $214 to $235.
• Morgan Stanley analyst Katy Huberty maintained an Overweight rating and raised the price target from $245 to $247.

Pricing

KeyBanc's Hargreaves considers the pricing of new iPhones to be reflective of a strategy to leverage power and growth.

“Apple increased the ASP for new iPhone SKUs by 19 percent vs. the last cycle. We believe this will help drive revenue and profit growth in FY19, as consumers have shown a willingness to pay for screen size. However, Apple is at the limits of screen sizes in reasonable form factors and we do not see other features that are able to drive significant demand, which suggests high risk of trade-down activity beyond the current cycle." 

According to a company note from Citi’s Jim Suva, pricing was among the most surprising aspects of Apple's update. For example, the iPhone XS Max is priced at $1,099 versus the expected price of $999, while the iPhone XR is priced at $749 versus the expected price of $799.

Morgan Stanley's Huberty agreed with the surprise factor and said the pricing updates incited significant investor concern.

“The most significant investor concern entering FY19 has been that without strong ASP growth, FY19 iPhone revenue growth is likely to flatline. Today's iPhone announcement is likely to dispel that fear. Apple's new highest end iPhone, the iPhone XS Max, is $100 more expensive than last year's iPhone X, while the iPhone XS is in line with last year's iPhone X pricing." 

The Apple Watch

Several analysts reacted to the unveiling of the newest line of Apple Watches.

Wells Fargo's Rakers said Apple’s integration of heart monitoring is positive for the product line, as the Apple Watch will now serve as an incremental driver of installed base expansion and existing customer lines.

Macquarie's Schachter said the new devices are historic.

“The Apple Watch Series 4 has been FDA-approved to be the first electrocardiogram product offered over the counter directly to consumers. Having devices with FDA approved medical capabilities and a potential path forward to create compelling healthcare subscription offerings around them is a positive for AAPL services." 

iPhone Sales

Raymond James' Caso expects the LCD-based iPhone XR to represent roughly 50 percent of total new device volumes on the basis of pricing and memory. “Of note, while the XR is powered by the same A12 processor as the flagship models, performance is lower, suggesting Apple may have throttled it to save battery life (and keep performance below the flagships)." 

Conversely, Oppenheimer's Uerkwitz anticipates the iPhone XS Max will be the most compelling driver of new users and switchers due to its size and SIM support.

“New iPhones have better processors, displays, cameras, battery life, biometric sensing and machine learning abilities, all of which are unlikely to distance themselves too much from iPhone X in regular users' eyes, in our view." 

Tigress Financial's Ivan Feinseth remains optimistic about the overall performance of iPhones. “ [The] iPhone continues to be its most important product because its sales continue to drive the ongoing expansion of AAPL’s ecosystem. I believe further upside in the shares from current level exists and continue to recommend purchase." 

Industry Response

Gene Munster of Loup Ventures said the event unfolded “largely as expected.” The iPhone lineup will likely provide upside over the next year, despite the probable increase in average selling price resulting from nine models being priced above $745.

Larger screens should prove a catalyst for this particular line," Munster said. "Display size increases have historically led to upside in units and ASPs. The iPhone Xs Max’s display size is 26 percent larger than the previous largest iPhone display (iPhone X). This is the largest increase in screen size since 2014, when the iPhone 6 display jumped 35 percent from the iPhone 5s."

Before the event, Statista produced an infographic indicating that the iPhone is Apple’s key to success. Since the initial iPhone in 2007, the product became Apple's biggest device and its most profitable in less than three years.

“The launch of the iPhone X in time for the holiday season last year propelled the iPhone’s revenue contribution to a record level of 70 percent for the holiday quarter, a record that Apple surely wouldn't mind breaking this year,” Statista’s Felix Richter said.

Price Action

Apple shares were up 2.37 percent at $226.31 at the time of publication Thursday.

Related Links:

Apple Debuts Faster, More Durable iPhones; New Watch Enters Medical Device Territory

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Photo courtesy of Apple.