Major Wall Street analysts generally liked Apple's fiscal third-quarter earnings report, but the declining iPhone business continues to be a big area of concern for analysts.
The company reported earnings and revenue that beat estimates on Tuesday after the closing bell on the backbone of its strong services and wearables business. Shares of Apple are up 4% in early trading.
But it was the first time since 2012 that the iPhone accounted for less than half of the company's overall sales.
"Apple's FY Q3 was solid," Bernstein analyst Toni Sacconaghi said.
"The core controversy of normalized iPhone growth remains unresolved – recent price cutting has clearly helped, but we remind investors that iPhones are still down -12% year over year, with big questions about replacement cycles still outstanding," he said.
While revenue growth continues to climb, other analysts say that won't be able to carry the company forever.
"Non-iPhone hardware revenues have exhibited mid-to-high teens y/y growth for 3 straight quarters, but we remain dubious that such growth can sustain over a multi-year time frame, especially when wearables/services revenues remain tied to iPhone growth, in our view," Deutsche Bank analyst Jeriel Ong said. "Given that we continue to have questions around the long-term growth of iPhones, we are remaining on the sidelines."
Investors shouldn't expect much from the iPhone anytime soon, though, according to Raymond James.
"Despite the absence of incremental downside now, we don't think this means Apple has yet turned the corner. We continue to expect a weak iPhone cycle through June '20, and while expectations are already low, we don't see a catalyst until the Fall '20 5G iPhones," analyst Chris Caso said.
It's "good enough for now," he added.
Here's what the major analysts are saying about Apple's earnings report:
Goldman Sachs — neutral rating
"We continue to see risk to consensus expectations for FQ1'20 to December and suspect that the short term risk on Services is to the downside but supporting data on this is unlikely to materialize until we start getting more clarity on iPhone sales in October/November. In addition to this we believe Apple is exposed to trade newsflow volatility and that the stock is fully valued."
Bank of America — buy rating, price target to $240 from $230
"Apple returned more than $21bn to shareholders in F3Q19 including $17bn in open market repurchases of 88mn shares, and dividends of $3.6bn. We expect the stock to react positively on the strong guide relative to low expectations."
Morgan Stanley — overweight rating
"While other technology companies are taking down numbers to reflect difficult compares and slowing macro data points, Apple has already taken its medicine with China-related estimate cuts back in January. As iPhone replacement cycles approach the mature PC market, growth is stabilizing helped, too, by a recovery in emerging markets, led by China. We see the potential for meaningful multiple expansion as new Services re-accelerate growth and Apple approaches the September 2020 launch of 5G iPhones, which have the potential to accelerate upgrades and return iPhone to meaningful Y/Y growth."
Bernstein — market perform rating and price target to $205 from $190
"Apple's FY Q3 was solid. The company beat on revenues primarily due to very strong growth in AirPods, and notably improved performance in China. These positives were partly offset by Services and iPhone revenues coming in just below consensus. That said, the key driver of the stock's positive after-market reaction was that Apple guided up expected FY Q4 revenues and gross margins, which are likely to trigger a ~5% increase to consensus FY Q4 EPS....The core controversy of normalized iPhone growth remains unresolved – recent price cutting has clearly helped, but we remind investors that iPhones are still down -12% YoY, with big questions about replacement cycles still outstanding;"
UBS — buy rating
"Against modest expectations, Apple delivered strong results and solid guidance - particularly in China as several factors are offsetting any brand backlash that might have resulted from the trade disputes. The only item to potentially feed a bearish narrative was services revenue that was a little light - but even this is still growing high teens constant FX. In the near-term, investor expectations for the Fall iPhone launch are appropriately low but even disappointing numbers the next few Qs just argue for an even bigger C2020 as we get 5G (multiple iPhone models) and the ramp of some potentially exciting new products (e.g. at least one foldable product and key new services like TV."
Citi — buy rating, price target to $250 from $205
"Read this slowly and ponder it: Apple's wearable, home, & accessory category is larger than iPad sales. This underscores a new theme that is starting to emerge from Apple, which we believe investors are overlooking and that is the diversity of Apple's offerings. The bulls are overly focused on Apple's services and the bears are overly focused on iPhone sales, units & ASP. While we do not discredit either of those views, we believe most are not realizing the diversity of Apple's offerings, which we believe will continue in the quarters ahead with Apple Card (Apple's credit card launching in August), Apple Arcade & Apple TV+."
J.P. Morgan — overweight rating, price target to $243 from $239
"The investment drivers for Apple shares are playing out as expected in relation to, firstly, upside to sentiment in 2019 being driven by outperforming the low bar of investor expectations, who have failed to fully appreciate the multiple levers Apple can pull in terms of promotions and broader distribution channels to drive iPhone volumes. Additionally, we see further upside to investor expectations moving into 2020, led by a strong product cycle comprising of the SE refresh in early CY20 followed by major spec upgrades in Sep-20."
Credit Suisse — neutral rating
"We're encouraged as Apple continues to recover from a difficult start to the fiscal year; however, iPhone remains a sustained drag heading into what we view as a more incremental fall launch cycle and we expect tailwinds from robust growth in "Other Products" (i.e., Wearables/iPad/Mac) to fade ahead. With the stock trading at a peak multiple and the omnipresent overhang from the unresolved US-China trade situation, we remain Neutral awaiting a better entry point and/or line-of-sight to Services-led EPS upside to break out of the historical valuation range."
Deutsche Bank — hold rating, price target to $210 from $205
"Overall, when we consider AAPL's valuation with the company's fundamental levers for further EPS upside, we see a balanced reward profile relative to the risks. Non-iPhone hardware revenues have exhibited mid-to-high teens y/y growth for 3 straight quarters, but we remain dubious that such growth can sustain over a multi-year time frame, espe-cially when wearables/services revenues remain tied to iPhone growth, in our view. Given that we continue to have questions around the long-term growth of iPhones, we are remaining on the sidelines with a Hold rating and $210 P/T."
Raymond James — outperform rating
"Good enough for now...Despite the absence of incremental downside now, we don't think this means Apple has yet turned the corner. We continue to expect a weak iPhone cycle through June '20, and while expectations are already low, we don't see a catalyst until the Fall '20 5G iPhones."