Analysts on Apple: Summer Doldrums and High iPhone 6 Costs

Source: Thinkstock

Source: Thinkstock

Despite both maintaining an “Outperform” rating on Apple (NASDAQ:AAPL) shares, two analysts recently offered some words of caution about the Cupertino-based company’s iPhone sales. RBC Capital Markets analyst Amit Daryanani warned of a downturn in iPhone demand over the summer as consumers hold off for the expected iPhone 6 launch in September. However, Daryanani noted that the slowdown would only be temporary before one or two new iPhone models sparked another surge in demand.

“Our supply chain checks give us conviction that AAPL will launch a larger screen iPhone (iPhone 6) in fall this year, we expect it will be around the month of September. AAPL will potentially launch two new phones: A larger (~5+”) screen phone ($100 premium), a refreshed ~4” screen and likely keep 5s and 5c in production (but drop price by $100),” wrote Daryanani in a note to investors seen by Barron’s. “Near-term, we are concerned that June-qtr guide could be below expectations as we see an air pocket from a demand perspective.”

Based on the iPhone demand “air pocket,” Daryanani lowered his fiscal third-quarter revenue estimate to $36.7 billion from $37.1 billion. However, the analyst also raised his fourth-quarter revenue estimate to $42.1 billion from $39.5 billion and noted that updates to the iPad product line will further boost Apple’s second-half payoff. Daryanani characterized Apple as “an attractive value-play” and cited the upside from expected “new product categories” that CEO Tim Cook has referred to in several interviews. The RBC Capital Markets analyst reiterated an “Outperform” rating and a $590 price target on Apple shares.

Like Daryanani, Bernstein Research analyst Toni Sacconaghi also reiterated an “Outperform” rating on Apple shares, although with a slightly lower price target at $575. However, instead of focusing on a seasonal lull in iPhone demand, Sacconaghi expressed concern about Apple’s margins on the upcoming iPhone 6 based on the expected increase in screen size.

“With all signs pointing to a significantly larger and more expensive screen for the iPhone 6, we struggle to see how Apple’s BOM [bill of materials] on the iPhone 6 will not be materially higher,” wrote Sacconaghi in a note obtained by Barron’s. “We estimate that ~25% of the iPhone’s bill of materials increases in proportion to the areal size of the phone — accordingly, a 4.7″ phone would that has a screen area that is ~30% larger could potentially pressure iPhone gross margins by ~400-500 bp, negatively impacting Apple’s EPS by 10%.”

Despite his worries about the higher cost of the iPhone 6, Sacconaghi acknowledged that most Apple customers will likely be willing to pay a higher price for a larger screen or increased functionality. “Arguably, given that most iPhone customers are on contract and that repurchase intention is high, a $50 – $100 price increase relative to the overall amount spent over the two year contract (~$2000) may be viewed as acceptable to consumers for a larger screen,” concluded Sacconaghi.

It should be noted that there has also been speculation that Apple will begin using sapphire displays for the next-generation iPhones. A harder and more scratch-resistant display may give iPhone customers another reason to pay a premium price for Apple’s iPhone 6.

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