Although it is early and we lack visibility into the critical December quarter, our initial estimates of iPhone component orders in FQ4 suggest Apple is anticipating demand in the next iPhone cycle that is ahead of our current expectations. A meaningful decline in F2016 iPhone unit sales has been our largest concern, so the slightly higher-than-expected initial order volume reduces risk to the shares, in our view.
Hargreaves notes, that as expected, the iPhone 6s is unlikely to see the same upgrade activity as the iPhone 6. “We do not anticipate the same rush of upgrade and switching activity in the 6s cycle as Apple experienced in the 6 cycle, which seems likely to drive slower sequential growth in sales volume in FQ1 (Dec.) and a slower associated ramp in component orders through December.”
Notably, orders for the current iPhone 6 still appear to be high as well.
iPhone demand appears to have remained solid in recent months, which, along with checks at suppliers, suggests the potential for Apple to sell 50 million to 52 million iPhones in FQ3 versus our estimate of 46.8 million. This could add as much as $0.20 to our FQ3 EPS estimate of $1.86, which is already $0.10 ahead of the Street estimate of $1.76.
As for the Apple Watch, Hargreaves believes that Apple is positioned to meet or exceed their FQ3 unit estimate of 5.5 million and F2015 unit estimate of 11 million. That being said the analyst believes that due to mixed reviews on the watch, component order volume for FQ3 and FQ4 will be about 13.3 million, less than the expected 15.5 million.
Hargreaves adds that a "dramatic increase in functionality is likely needed to grow unit sales and meet current expectations for F2016 unit volume". However, any downside from the Apple Watch will likely be limited by iPhone profits, extremely high retention rates, strong cash flow and buyback activity.
"This is likely to limit downside, which creates a slightly more positive risk/reward, in our view," said the analyst.