Technology

Why Merrill Lynch and Oppenheimer Are Cautious on Apple Before Earnings

Chris Lange

Published: April 22, 2016 10:50 am

Last Updated: January 13, 2020 10:25 am

As earnings season has kicked off for the spring quarter analysts are clamoring to pick the correct bulls and bears out of the bunch. Two key analysts are making a cautious note on one of the most popular stocks out there that is reporting early next week. Apple Inc. (NASDAQ: AAPL) is that stock, and although Merrill Lynch and Oppenheimer are not going completely bearish on it, they are still thinking that these earnings could be relatively soft.

Considering the whirlwind of negative news around high-end smartphones from TSMC, Qualcomm, Largan and more, expectations are muted for the June quarter. Merrill Lynch is continuing to model 50 million iPhones for March and 44 million for June.

The brokerage firm is adjusting its mix to reflect the demand for the SE version that has a lower average selling price (ASP) and gross margin. Merrill Lynch expects Apple to increase its share repurchase authorization during fiscal second-quarter earnings. As a result, the firm reiterated its Buy rating (but lowered its price target to $125 from $130) on the potential of a strong iPhone 7 cycle, and optionality afforded by a large cash balance to enter new addressable markets. Merrill Lynch also moved its fiscal 2016 estimates to $8.85 in earnings per share (EPS) on $229 billion in revenue.

Merrill Lynch detailed in its report:

We model 50 million iPhone units for the Mar quarter and 44 million for the June quarter, and our unit estimates are marginally lower than the Street. … Our estimates are baking in an assumption of about 20% year-over-year decline in the base iPhone business in both the March and June quarters. Given the iPhone SE is supply constrained, we expect limited ability to drive upside in the June quarter. Lower volumes and mix is likely to create modest gross margin pressure in the June quarter somewhat offset by FX tailwinds. We expect gross margin guidance in the range of 38%-39%.

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