'Jaw-Dropping': Wall Street Reacts To Apple's Guidance Cut, China Business

Apple Inc. AAPL cautioned investors Wednesday that its holiday quarter revenue is likely to come in "lower than anticipated." Here's how Street analysts are reacting to the guidance cut. 

The Analyst

• Wedbush's Dan Ives maintains an Outperform rating on Apple with a price target lowered from $275 to $200.
• Bank of America Merrill Lynch's Wamsi Mohan maintains at Neutral, price target lowered from $220 to $195.
• Baird's William Power maintains at Outperform, price target lowered from $230 to $185.
• Wells Fargo's Aaron Rakers maintains at Market Perform, price target lowered from $210 to $160.
• KeyBanc Capital Markets' Andy Hargreaves maintains at Sector Weight.
• Rosenblatt Securities' Jun Zhang maintains at Neutral, unchanged $165 price target.
• Tigress Financial Partners' Ivan Feinseth.
• Loup Ventures' Gene Munster and Will Thompson.

Shares of Apple hit a new 52-week low of $142.81 Thursday morning and were down 8.54 percent at the time of publication. 

Wedbush: 'Jaw-Dropping' Guidance

The Street was mostly expecting a certain degree of softness from Apple but the company's Wednesday guidance implies a "jaw-dropping" 8-percent top-line miss, Ives said in a research report. In addition, the guidance announcement is "clearly Apple's darkest day" and a defining moment for CEO Tim Cook, he said. 

Apple has two options moving forward, the analyst said:

• Maintain the course with no pricing changes and hope the next iPhone release will result in large-scale user upgrades.
• Enact significant price reductions ahead of the next iPhone launch to generate new demand in China.

BofA: China Deterioration Worse Than Expected

Bank of America downgraded Apple's stock in 2018 based on anticipated weakness in China, Mohan said in a research report. But Wednesday's guidance revision suggests demand for iPhones in China "deteriorated materially" over the past two months.

Looking forward, the Street is likely to continue revising estimates lower, which will pressure Apple's stock, the analyst said. 

Baird: Shares Attractive For Long-Term

Apple's guidance announcement is "clearly disappointing" given the company's reputation of hitting the December-ending quarter guidance, Power said in a note. Yet Apple stock is now trading at around 12.8 times estimated calendar year 2019 EPS, or at just 10.6 times when adjusting for cash. This compares to the stock's historical average of around 14 times and is approaching prior troughs near nine times forward earnings.

The current multiple could prove to be attractive for long-term investors, the analyst said. 

Related Link: Raymond James: Lumentum Still A 'Strong Buy' Despite Apple's Guidance Cut

Wells Fargo: 3 'Derivatives'

Apple's guidance could trickle over to three segments of its supply chain, Rakers said in a note:

• The iPhone XS and XS Max was a key driver in Intel Corporation INTC's growing modem business.
• Apple accounted for 60-80 percent of Broadcom Inc AVGO's wireless segment revenue.
• Smartphones as a whole represent around 35-40 percent of total NAND Flash and DRAM bit consumption, with Apple alone accounting for 15 percent or more of total bits consumed.

KeyBanc: Not Just China Problems

Apple highlighted weakness in China, but the company's problems extend beyond Asia, Hargreaves said in a note.

Apple's "aggressive" price increases to the iPhone in 2018 coupled with minimal differentiation in the new models prompted many users to either hold off on upgrading their phones or trading down their devices, he said. There is little reason to expect these trends will improve in Apple's favor in the medium term, which implies "soft" iPhone results are likely to continue, the analyst said. 

Rosenblatt: Cautious On March Quarter, 2019

Apple's March-ending quarter is likely to come in short of normal seasonality, with an estimated 39 million iPhone units shipped for the quarter, Zhang said in a note. The company could end up shipping 10 percent fewer iPhones in calendar 2019 vs. 2018, the analyst said. 

Tigress Financial: Buying Opportunity

The weakness in Apple's stock represents a buying opportunity for not only Apple but many of its component suppliers, Feinseth said in his daily newsletter. His bullish stance stems from signs of Apple customers spending "more than ever" on services within Apple's ecosystem.

Apple is rumored to be preparing the launch of an "Apple Prime type of subscription" that would combine music, cloud storage, AppleCare and even a video streaming platform, he said. This would give Apple direct exposure to monetize 750 million iPhone users and supports "significant upside" in Apple's stock from current levels, in Feinseth's view. 

Loup Ventures: The 'Healing Process' Starts

Apple attributed most of its guidance revision to China-related woes, but the Asian country only accounts for 15 percent of Apple's total revenue, Munster and Thompson said in a blog post. Apple made a mistake in assuming the consumer reaction to a 23-percent increase in the iPhone average selling price in 2018, according to Loup. 

Apple needs to rebuild investor confidence, and the "healing process" could start with Apple's December-ending quarter earnings and guidance, Munster and Thompson said. If the March-quarter ending revenue guidance at the midpoint translates to revenue growth that is better than the negative 5 percent that will be reported in the December-ending quarter, then investor confidence will improve, they said. 

Related Link: Wedbush: Trade War Could Mean Supply Chain Disruption, Higher Costs For Tech Sector In 2019 

Photo by Daniel L. Lu/Wikimedia.