Why Apple’s Supply Chain Trouble May Not Matter

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Apple Inc. (NASDAQ: AAPL) may have some concerns building around just how many new iPhones it really will sell in the near term. Are delays on the horizon? There have been some concerns about production in China, but one analyst believes that these delays won’t matter.

Credit Suisse has lowered some of the expected iPhone unit estimates for sales in 2017. The news might sound concerning, but Kulbinder Garcha maintained his Outperform rating and his $170 target on Apple. One driving force is a silver lining in any iPhone delays, and the ultimate growth of Apple’s service revenues in the coming years.

The brokerage firm gave its fiscal third-quarter estimates as $1.60 in earnings per share (EPS) and $45.4 billion in revenue. The consensus estimates are EPS of $1.57 and $44.9 billion in revenue.

Credit Suisse continued in its report:

We now lower our C3Q/4Q’s iPhone unit estimate to 43.5 million/82.3 million and lower calendar 2017 unit to 221 million from 229 million, reflecting the supply parts tightness of the OLED version, which we believe will start shipping in October. However, we continue to highlight a degree of pent up demand from the iPhone installed base ahead of the major iPhone 8 super cycle, with calendar year 2018/2019 unit estimates at 248 million/268 million, as well as a continued mix shift toward the highest end model. We now adjust calendar year 17/18/19 EPS to $9.10/$11.89/$13.11 (from $9.50/$11.95/$13.16).

iPhone installed base supports LT units at 270 million. Apple’s installed base has seen robust growth over the past few years from 440 million at the end of 2014 to 600 million/690 million in 2015/2016 (+36%/+15% year over year), despite relatively muted 6S and 7 cycles.

Credit Suisse sees the iPhone 8 supercycle potentially unleashing the pent-up demand for the 10th anniversary iPhones, driving unit shipments to 221 million, 248 million and 268 million in 2017, 2018 and 2019, respectively, with the iPhone installed base expanding to 775 million, 890 million and 970 million, respectively.

The firm’s estimates could still prove conservative, as it assumes a replacement cycle of 31.5, 31.0 and 31.0 months in the coming years, relatively flat versus 31 months in 2016. Additionally, Credit Suisse sees a strong mix of the OLED version at 48% in the second half of 2017, rising ASPs for the coming cycle to $704 in calendar 2018 from $647 in calendar 2016.

Apart from this, Services revenues could rise to $52 billion long term from $26 billion, driven by a high-quality, affluent, digitally transacting user base of 1.1 billion devices and around 650 million users. Given that gross margins are around 70% for this business, it would suggest that services will contribute $39 billion in gross profit long term from $19 billion today, driving gross margin over 40% over time.

Shares of Apple were last seen up nearly 1% at $153.43 on Tuesday, with a consensus analyst price target of $160.18 and a 52-week range of $96.42 to $156.65.