Apple iPhone event could mark turning point in spite of low expectations, say analysts

With a declining stock, and general negative sentiment against the company, Apple needs to get its mojo back.

But lukewarm expectations ahead of Wednesday’s product launch in San Francisco — where CEO Tim Cook is expected to introduce the iPhone 7, among other things — could help push the stock higher in coming months, say analysts.

Apple’s fortunes have become so closely tied to iPhone sales — expected to decline 12 percent in the September quarter when compared with sales in the September 2015 quarter, according to Factset data — and investors remain concerned about a lack of innovation.

“There has been no shortage of gloom and doom around Apple over the past several months, similar to the summer of 2013,” said Drexel Hamilton analyst Brian White. The stock is trading around $108, down about 4 percent from this time last year. Meanwhile the S&P 500 Index is up 12 percent over the same time period.

Apple has become the Jason Bourne of tech, said White. The company is being chased by everyone, from the FBI demanding help unlocking an iPhone, to the Chinese shutting down Apple’s books and movies, to European regulators demanding back-taxes and investors looking to short the stock. Apple’s stock, profits and sales likely bottomed in the second quarter of fiscal year 2016 and Wednesday’s event could mark a turning point, he said.

With such low expectations leading into Apple’s big product unveil, the introduction of even a modest upgrade — like better iPhone battery life — could drive the stock higher, said Piper Jaffray analyst Gene Munster.

A customer counts cash to pay for two iPhone 6 smartphones during the sales launch at the Apple Inc. store in New York.

Victor J. Blue | Bloomberg | Getty Images
A customer counts cash to pay for two iPhone 6 smartphones during the sales launch at the Apple Inc. store in New York.

The iPhone 7 is expected to have an updated design, with the biggest change likely to be the removal of the headphone jack. Apple is expected to ship the device with Lightning headphones and a dongle adapter to connect old headphones to the Lightning port, according to a report from Pacific Crest analyst Andy Hargreaves on Aug. 31.

Other expectations for the iPhone 7: Tweaked antenna lines, a new black color, new cameras including a dual lens camera for the iPhone 7 Plus, a doubling in storage capacity of the entry level device to 32G, and an increase in storage capacity to 256G for the most expensive device. The iPhone 7 is likely to go on sale on Sept. 16, a week earlier than the new iPhone was made available last year, which should help Sept. quarter sales.

The dual lens camera for the iPhone 7 Plus, which would enable higher quality photos, and greater storage capacity should persuade some consumers to buy new phones, said analysts. A “healthy upgrade” is all Apple really needs to unveil to persuade investors that declining growth had more to do with tough comparisons with the iPhone 6 than competition, said White.

“It is going to be a solid upgrade, high quality product that will return the iPhone and Apple to growth in 2017,” said White.

Apple also caught a lucky break with Samsung announcing it would halt shipments of the new Galaxy Note 7 device. Analysts had expected Samsung to sell well over 10 million Galaxy Note 7 devices in the second half of this year, which should bode well for Apple’s iPhone 7 Plus given it is similarly expected to feature a dual camera, said White.

“The timing could not be more propitious for Apple,” he said.

It all adds up to a return to growth for Apple’s iPhone starting in the second quarter of fiscal year 2017, when the people who bought iPhone 6 devices are ready to upgrade their phones, said White. In general, analysts expect Apple to return to growth in fiscal year 2017, bolstered by a possible “super cycle” driven by the 10 year anniversary iPhone 8.

Apple is also expected to introduce updates to Apple Watch, including new strap designs and the addition of native GPS and better wifi capability, noted Hargreaves. GPS is a key feature of many fitness trackers, which are the most in-demand features of wrist-worn wearables, and therefore has the potential to drive growth, he wrote.

Pacific Crest expects Apple Watch sales to decline 5 percent to 9.7 million in fiscal year 2017. The addition of GPS — if it proves attractive enough to consumers — could be enough to renew growth, wrote Hargreaves. That said, Apple will likely need to roll out a less expensive low-end smartwatch to capitalize on the opportunity in fitness wearables.

Apple will likely introduce new Beats products and wireless Bluetooth earphones called “AirPods,” according to MacRumors. Apple’s MacBooks and iPad product lines are also due to be updated, likely on Wednesday or at an event later this fall.

Customers shop at a new Apple store on August 16, 2016 in New York City.

Getty Images
Customers shop at a new Apple store on August 16, 2016 in New York City.

The company should also reveal the release date of new iOS, Mac, TV and Watch software previewed at its Worldwide Developer Conference in June. Apple will also show off some expansions to apps, such as Apple Pay. It will be interesting to see which apps Apple highlights on stage, said Munster. For example, he said, we know the new iPhone has a great camera.

“Beyond that, will it make Pokemon better?” he said.

Lastly, analysts will be watching closely for any updates around Apple TV. The company has been building up its services business and on its most recent earnings call, Cook teased updates coming out in the Fall. “You shouldn’t look at what’s there today and think we’ve done what we want to,” he said. “We’ve built a foundation that we can do something bigger off of.”

“Something on the video content would probably be the biggest thing we would wish for,” said Munster.