Goldman Sachs: iPhone 7 Will Drive Apple's Upside

Apple Inc. AAPL reported mixed results for its fourth quarter, with EPS topping the consensus estimate while revenue missed slightly the mark. Goldman Sachs is still bullish on Apple as it believes the strong guidance supports its near-term thesis that the iPhone 7 will drive upside to consensus.

For the fourth quarter, Apple reported sales/EPS of $46.9 billion/$1.67. The upside from iPhones was offset by Mac and iPad downside.

For the first quarter, Apple expects sales of $76-$78 billion versus consensus at $74.9 billion, with gross margins at 38-38.5 percent.

Apple’s iPhone business continued its recovery, as both 45.5 million units (-5.3 percent year-over-year) and revenue of $28.2 billion (-12.6 percent year-over-year) beat Street expectations. Further, ASPs recovered 3.9 percent sequentially to $619. In addition, Services delivered 24 percent year-over-year growth.

“Apple’s quarter was largely in line, as the company was not able to fully capitalize on strong iPhone 7 demand due to supply constraints,” analyst Simona Jankowski wrote in a note.

Apple expects iPhone 7 supply to catch up to demand before year-end, though iPhone 7 Plus supply is still likely to be constrained exiting December. As a result, the analyst modestly cut December quarter iPhone unit estimate to 76.6 million from 78.1 million, though still above prior consensus of 75.8 million.

Meanwhile, Apple forecast flat iPhone ASPs on a stronger than expected mix shift to the 7 Plus. This implies sequential increase of 11.6 percent to $691, which is 5 percent ahead of GS/consensus.

Jankowski has a Buy rating with a price target of $124 on shares, which closed Tuesday at $118.25. In the pre-market hours, the stock was down 2.75 percent to $115.