Bernstein Bets On Apple Citing Its China Connect; Hikes Q3 Estimates

Bernstein analyst Toni Sacconaghi modestly increased his Q3 estimates on Apple Inc AAPL due to better-than-expected supply availability in the quarter and healthy Chinese demand, offset by incremental currency headwinds. 

He raised the Q3 estimates (revenues from $82.8 billion to $84.0 billion, EPS from $1.17 to $1.19) due to better than expected supply availability in the quarter (he saw the $4-8 billion expected headwind coming in at the low end or below) and healthier Chinese demand, offset by incremental currency headwinds. The effect is that he is 2% higher than consensus on revenues and 3.5% higher on EPS. 

He forecast services growth of 12%, driven by a tough advertising comp and lackluster App store growth. 

Further, Sacconaghi sees conflicting forces at play for Apple's Q4. 

On the one hand, and to the degree that manufacturing is more benign in Q4, Apple could potentially deliver above sequential growth in Q4, also helped by some inventory replenishment. 

Conversely, incremental consumer weakness and currency headwinds could weigh on results. 

The analyst expects Apple to continue to provide "guidelines" rather than guidance. He suspects any commentary that points to at least high-single-digit year-over-year growth for Q4 would likely be positively viewed.

He believes that AAPL may have "over-earned" in FY 21 (FY 22) amid work/ learn from home and strong consumer spending, which could reverse, particularly as consumers' spending priorities change. 

He saw some opportunity for Apple to continue outperforming through its iPhone launch in September, per its historical pattern. Still, he believes risk/reward over the next 0.5 years - 2 years is neutral to modestly negative. While AAPL's valuation has declined materially YTD, from 30x earnings to 24x, Apple is still not inexpensive. 

The stock continues to trade well above its historical level on a relative basis and notably above other FAAMG names with superior growth. 

Sacconaghi had a Market Perform rating on Apple with a price target of $170.

Price Action: AAPL shares closed lower by 2.06% at $147.07 on Monday.

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