Morgan Stanley Explains Why Apple Investors Need To Be 'Cautious' Ahead Of Earnings

Apple Inc. AAPL is scheduled to report its fiscal second quarter earnings report on May 1 and investors should hold a "cautious" stance ahead of the print, according to Morgan Stanley.

The Analyst

Morgan Stanley's Katy Huberty maintains an Overweight rating on Apple's stock with a price target lowered from $203 to $200.

The Thesis

Apple is expected to report in-line with estimates although at the low end of management's own guidance, Huberty said in a note. Specifically, Apple is likely to report:

• iPhone shipments of 52.3 million units;
• iPhone average selling price of $718;
• Total revenue of $60.2 billion;
• EPS of $2.69; and
• Gross margin of 38.5 percent.

A cautious stance on Apple's stock is warranted, however, as Huberty thinks the Street's estimates for Apple's June-ending quarter appear to be too high. The Street is modeling Apple to ship 42.9 million iPhone units, but this may need to be revised "meaningfully lower" due to weak supply chain data and ongoing weakness in China.

A more realistic estimate for iPhone shipment in the quarter would be 34 million, which implies a 17 percent decline from a year ago and now stands 20 percent below the consensus estimate, the analyst wrote.

Despite the possibility of a reduction in sentiment for Apple's June quarter, Huberty said investors should be buyers of any weakness. One reason is that Apple's large buyback program is a source of downside protection for the stock.

Price Action

Shares of Apple closed Thursday's session at $172.80.

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