24/7 Wall St.

Apple Inc. (NASDAQ: AAPL) managed to offer a positive surprise with its earnings report. One thing that stood out was an unexpectedly better iPhone sales, on a relative basis. This was a quarter in which not many investors and analysts were expecting good news. We have seen most analysts either sticking with or increasing their positive outlook on Apple. Still, there is at least some caution out there.

When Apple reported earnings, the bar was set rather low, with very few of the past huge growth expectations. Apple’s fiscal third quarter brought earnings per share (EPS) of $1.42 on revenues of $42.4 billion. This compared to $1.85 EPS on revenues of $49.6 billion a year earlier, but were ahead of the Thomson Reuters consensus estimates of $1.38 EPS and $42.09 billion in revenues.

Apple sold some 40.4 million iPhones in the quarter. This is a massive number of phones, but it was down from 47.5 million in the same period of 2015. Sequentially, unit sales dropped by 21% and iPhone revenues dropped by 27%.

24/7 Wall St. has noticed that Apple’s performance has failed to live up to expectations from the Apple 2016 bullish and bear outlook from the start of this year. Many different details and factors were present then, but the consensus analyst price target was closer to $148 at the start of 2016, and that would have implied an upside return of more than 40% if the analysts had been right.

Apple was reiterated as Outperform by Credit Suisse’s Kulbinder Garcha with a $150 price target. It is important to know that Garcha is currently one of the biggest Apple bulls on Wall Street, at least if the $150 price target is considered. This call points out that Apple’s services thesis remains intact, with a material potential for Apple’s services business with an accelerated growth of the install base and the App Store. An inflection in Apple Music revenues was also cited.

Garcha talked up Apple’s gross margins and services further, along with a trough in Apple’s valuation. The report said:

Management noted that gross margin (net basis) was significantly higher, further supporting our long-term view that Services can grow from 15% of gross profit today to 30% long-term. Interestingly, the company noted that next year Services is expected to be the size of a Fortune 100 company, suggesting revenue in excess of $28 billion versus today’s run rate of $24 billion

Acknowledging a weaker product cycle near-term, we still see solid risk-reward arguments. We see a trough valuation of P/E ex-cash of about 8.5 times and add back roughly $13 per share of fully taxed net cash, suggesting support at $97. Given the Services growth and an installed base that could reach roughly 1.4 billion long-term, we see sustainable free cash flow of $67 billion long-term with a valuation of $150.

Merrill Lynch reiterated its Buy rating on Apple, along with a $120 price objective. The firm’s Wamsi Mohan actually gave 10 reasons to own Apple after the last quarterly earnings report. These were listed as follows:

(1) less than feared impact from mix of iPhone SE to gross margins;
(2) iPhone sell out declines moderating;
(3) Switchers into ecosystem remain strong and span across models beyond SE;
(4) iPhone ASPs set to improve at least in the near term;
(5) channel inventory at low-end of range;
(6) new iPhone introductions likely on September 16;
(7) services revenue growth strong into 2017;
(8) gross profit dollar growth has likely troughed in the June quarter;
(9) capital return continues;
(10) iPad returned to revenue growth after 9 quarters of declines.

Raymond James raised its rating to Outperform from Market Perform with a $129 price target. That call is now centering on a focused return to a more sustainable rate of growth, even if that is slower growth than many investors might have expected in the past from the mighty Apple. This does of course include the caveat of no serious recession, but that may be the same caveat from anyone on anything these days.

What is perhaps more important in the Raymond James call is that the firm expects a market rerating for a higher price-to-earnings (P/E) multiple that would rise to 15.5 rather than the current 11.6. The firm was impressed with Apple’s 38% gross margin level, considering that Apple’s inventory was filled with lower margin iPhone SE units. Raymond James also is looking for more muted product cycles ahead, but it thinks 2017 will be better than average.

Oppenheimer has a Perform rating, and the firm’s Andrew Uerkwitz has no price target. His report noted that the inline report was boosted by recently reduced expectations and a series of negative analyst commentary on iPhone cycle weakness and competitive threats. Oppenheimer pointed out a 33% decline from a year earlier in China revenues but was more optimistic about China ahead due to its market-leading installed base and customer loyalty. Oppenheimer continues to expect that the iPhone 7 product cycle will be weak and more dramatic changes will come to the iPhone in 2017.

Piper Jaffray’s Gene Munster, who has been one of the biggest Apple bulls for years, was calling for services revenue of $5.9 billion ahead of earnings. Munster trimmed his price target slightly, down to $151 from $153. Given this is from one of the top Apple bulls for years, some investors might make note of this. Still, Munster’s target remains about 25% higher than the consensus analyst target.

Wells Fargo’s Maynard Um has an Outperform rating on Apple with a valuation range of $115 to $125 that remains in place. His report is based on roughly 10 times the firm’s 2017 free cash flow estimate, and he noted that the extra week and strengthening margins provide visibility for the second half. Wells Fargo said:

Key risks include potential demand pressures due to global economic uncertainties, China exposure, mis-step in product cycle, legal disputes and greater than expected margin pressures.

We believe the risk/reward at 8 times our free cash flow estimate is tilted favorably with investor sentiment likely reflecting potential first half softness and our view that iPhone shipments have not peaked and would increase year over year in December of 2016.

S&P Global maintained its Strong Buy rating on Apple shares, with a $130 price target. This is based on a P/E ratio of 13 times the S&P 2018 EPS estimate — or 10 times if you exclude Apple’s net cash. These ratios are said to be above Apple’s hardware peers and competitors, but it is below the ratios for the S&P 500 Technology sector.

Other key analyst calls with price target changes in Apple were as follows:

• BTIG raised its price target to $124 from $115.
• Citigroup raised target price to $120 from $115.
• JPMorgan raised its price target to $107 from $105.
• Macquarie raised its price target to $115 from $112.
• Maxim Group raised its target to $173 from $168.

The bulls and bears obviously still have a lot to fight over here. Apple’s short interest declined ahead of earnings. We still have yet to see anything real on new products regarding an Apple car initiative (if it is even a real car or a system for inside the cars) and artificial intelligence. Ditto for virtual reality, and some still even hope for that old rumor of an Apple television set.

Apple shares were last seen trading up 6.5% at $102.91, and the 39 million shares on an average day was crossed in less than the first hour of trading on Wednesday. Apple’s 52-week trading range is $89.47 to $123.82, and the Thomson Reuters consensus analyst price target is $122.93.