We expect a generally in-line June quarter with no major surprises to iPhone units (42 million units) or gross margins when Apple reports its FY3Q18 (June) results tomorrow after the bell. This quarter takes a back seat to the “main event” which is all about the FY19 underlying iPhone demand picture and ramping services business which remains a key incremental growth driver for Cook & Co. for the coming years. In terms of the quarter, we believe there could be some upside on the all-important services/software front along with ASPs potentially another bright spot and top-line catalyst. In a nutshell, the Street is all focused on the demand trajectory for the September quarter and most importantly into 2019 with the trifecta of next generation iPhones on the horizon and the Street modeling iPhone shipments of roughly 220 million units, which could ultimately prove to be conservative in our opinion given the underlying demand drivers. We believe 350 million iPhones are in the “window of opportunity” to upgrade over the next 12 to 18 months with Apple needing to capture a majority of these units as part of this upgrade cycle to make a clearly successful iPhone product cycle in 2019 and lay the groundwork for future services/software growth and steady iPhone demand over the coming years. We expect three new iPhone releases (5.8 inch to 6.5 inch OLED Plus designs with a lower priced LCD model) staggered over the next 3-6 months to hit the market that will help capture the underlying demand/upgrades among customers that have decided to bypass the 8/8+/X cycle this past time around, with price points and features that catalyze fence sitting iPhone customers onto their next smartphone during the course of 2018 and 1H2019 with Chinese consumers front and center. With June and September Street numbers now hittable/beatable, it appears Apple shares/valuation is set up well heading into a potentially robust product cycle over the coming quarters along with a massive capital return strategy as another tailwind for Cupertino (and its investors). We maintain our Highly Attractive rating and $200 price target.
Looking out into FY19; China consumer demand a key driver. The massive uptick in ASPs that Apple has experienced on the heels of a modestly successful iPhone X launch, a services business which we forecast is on a trajectory to be a $50 billion annual revenue stream by FY20, and an unparalleled consumer franchise which now has 1.3 billion active devices worldwide speaks to the potential tailwinds that Cook & Co. has for the foreseeable future in our opinion as it further penetrates its massive installed base. The main swing factor in our opinion looking ahead is China as we estimate over a 100 million iPhone installed base in this key region, with over half of these consumers due for an upgrade during the course of FY19. In particular, we estimate between 60 million and 70 million Chinese iPhones will be in the “upgrade window” over the coming year with iPhone’s next generation trifecta of smartphones as a major potential product catalyst in the all important Chinese market, which could see a renaissance of growth on the horizon for Apple despite lingering worries around the overall China market (e.g. tariffs, demand, supply chain disruptions, lower price competition).