Apple remains an 'uninspired investment,' prepare for earnings miss: Analyst

  • "Investors have sufficiently dissected the key near-term drivers of the shares. Consensus estimates are likely to fall on weak iPhone demand," Jeffrey Kvaal wrote.
  • His earnings per share estimate for Apple's second fiscal quarter of $2.69 is below the consensus Wall Street estimate of $2.71, according to FactSet data.
  • Kvaal reiterated his neutral rating on the stock as well as his $175 price target, implying 1.8 percent downside over the next year.

Apple remains an "uninspired investment" and investors should brace for disappointing iPhone sales and profit in two weeks, Nomura Instinet warned clients Wednesday.

"We believe the investors have sufficiently dissected the key near-term drivers of the shares. Consensus estimates are likely to fall on weak iPhone demand," analyst Jeffrey Kvaal advised investors. "We add that our work into China also suggests the X malaise continues."

Kvaal reiterated his neutral rating on the stock as well as his $175 price target, implying 1.8 percent downside over the next year.

He also said that the Nomura's research found shipments of non-Chinese smartphones out of China (which are mostly iPhones) fell 9 percent year-over-year in the first quarter.

Customers looking at the Apple iPhone X
Chesnot | Getty Images
Customers looking at the Apple iPhone X

"The lower shipments suggest that Apple's Greater China revenues should be at the very least a significant drag on our overall estimate of 18 percent iPhone revenue growth in the second fiscal quarter," Kvaal added.

His earnings per share estimate for Apple's second fiscal quarter of $2.69 is below the consensus estimate of $2.71, according to FactSet data. He sees EPS of $2.12 in the third quarter, below expectations of $2.19.

Shares of Apple fell 0.2 percent Wednesday following the analyst's note. The company is expected to report earnings May 1 after the bell.

As the world's largest company, Apple's recently soft iPhone sales have given Wall Street pause, especially because unit sales comprise such a large portion of its revenues.

Goldman Sachs, for example, initiated coverage for Apple with a neutral rating in February due to its expectations that the smartphone maker will miss sales targets for the June quarter.

"We balance our positive view on longer-term iPhone revenue growth … with weakening near-term datapoints on iPhone X demand, which we think will likely weigh on shares ahead of the second fiscal quarter's earnings report," Goldman analyst Rod Hall wrote at the time.

Still, some are optimistic that Apple's plan to return a large amount of capital to shareholders could spur shares higher. How Apple will deploy its capital remains unclear, with options ranging from a dividend or buyback to a new acquisition.

For his part, Kvaal believes it unlikely Apple will make a big acquisition, citing its history of avoiding large-scale buyouts.

"Apple has traditionally been conservative in acquiring large companies. Its largest acquisition to date has been Beats for $3 billion," he explained. He suggested that it could, instead, dedicate roughly $25 billion for dividends over the next five years, leaving an additional $135 billion left for share repurchases.