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The Ratings Game: Why Apple bulls aren’t sweating the latest earnings disappointment

Investors were pushing the sell button on Apple Inc. shares early Friday following disappointing results, but many Wall Street analysts held their bullish ground, saying demand for the tech giant’s products is not going anywhere.

Shares of Apple
AAPL,
-3.20%

fell over 3% in Friday morning trading after the iPhone maker reported its first miss on revenue since the holiday quarter of 2018, as Chief Executive Tim Cook said silicon shortages and COVID-related manufacturing problems led to a $6 billion negative hit.

But Cook also said demand for the company’s products was “robust,” which was providing a source of comfort for Wall Street analysts in the aftermath of an uncharacteristic miss by Apple.

Read: Microsoft eclipses Apple as largest U.S. company for first time in nearly 16 months

A team of UBS analysts led by David Vogt said that they see December as a bottom for the company’s woes. Their checks indicate Apple’s supply chain and COVID headwinds in South East Asia impacted sales by around 5 million units in the quarter, but they see demand as “likely persistent given backlogs.”

The UBS analysts kept their fiscal 2022 unit-sales estimate of 230 million intact despite the supply pressures. “Moreover, we believe our forecast could prove conservative if the 5 million lost units are captured in FY22,” said Vogt and the team, who maintained a buy rating and 12-month price target of $175.

Among the positives: services revenue that came at $18.3 billion, some 7% above their estimates and paid subscriptions that grew to over 745 million customers, while Macs and iPads delivered “solid upside to estimates,” said the UBS team.

The services business helped lead to strong margin performance, noted Evercore ISI analysts led by Amit Daryanani. Apple’s gross margins “are structurally moving higher,” he wrote, driven by a record high for services margins.

Daryanani predicts a continued inflection in overall gross margins during the current fiscal year amid an expected “top-line acceleration” in highly profitable parts of the business. Within services, he views advertising as “a key upside lever going forward” given room for the company to expand beyond the App Store.

As for the iPhone business, Daryanani sees demand as merely “deferred” due to the supply pressures, meaning that the company could see benefits later in its fiscal year. The current supply crunch could “bolster growth” for the iPhone business in the seasonally slower March and June quarters, wrote Daryanani, who has an outperform rating and $180 price target on Apple’s stock.

In all, the dynamic “effectively will enable iPhone and revenues to grow in FY22,” Daryanani wrote. The FactSet consensus currently calls for a slight increase in iPhone revenue during fiscal 2022, to $193.0 billion from $192.0 billion.

Opinion: Apple and Amazon are struggling, so investors may want to look to these tech stocks instead

Wedbush analysts Daniel Ives and John Katsingris took a similar view. “We view this issue purely as a victim of the supply chain for Apple and NOT a demand issue for iPhones which remains the foundation of our bullish thesis and robust Services business into FY22 with iPhone 13 leading the way,” they told clients in a note.

“While the bears will hang their hats on this supply chain issue and a valuation that has re-rated saying the Apple bull party is over, instead we could not disagree more and view any sell off as a golden buying opportunity given our robust view of Apple’s demand story into 2022,” said Ives and Katsingris, who kept their outperform rating and $185 price target.

Apple’s channel inventory remains below normal, its services sector continues to do well and the company’s installed base continues to grow, chimed in Citi analysts Jim Suva and Asiya Merchant, who kept their buy rating and $170 target price.

“We do not believe this is a thesis changer because competitors are also experiencing shortages. Simply put demand for Apple products is materially above supply,” they said.

Barclays analysts led by Tim Long took a more mixed view. “We continue to believe that supply-chain weakness may mask what we expect to be a challenging period for iPhones, Macs and iPads over the next year,” they wrote.

On the plus side, Apple showed stronger overall performance in China than the Barclays analysts had anticipated, but they still have concerns about the fact that global iPhone revenue fell on a sequential basis.

The Barclays team rates Apple’s stock at equal weight. The analysts bumped their price target to $145 from $142.

Bank of America’s Wamsi Mohan and his team also had some concerns. “We view the results and guide as a precursor to more in-line results relative to consensus vs. the significant beats over the past several quarters, where the company benefited from increased device and services demand,” they wrote.

The analysts project that Apple’s growth rates will ” decelerate sharply (starting in Dec quarter) and likely turn negative for March and June quarters,” and they also expect that Apple will post full-year drops in iPhone and iPad revenue during fiscal 2022. The Bank of America team has a neutral rating and $160 price target.

Apple shares have gained 11% in the year to date, while the Dow Jones Industrial Average
DJIA,
+0.19%

has advanced 17% and the S&P 500
SPX,
-0.04%

has climbed 22%.

Opinion: Apple and Amazon are struggling, so investors may want to look to these tech stocks instead

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