Despite Mounting Concerns, Apple (AAPL) Risk-Reward Looks Favorable

The bloodletting in Apple (NASDAQ: AAPL) is hard to camouflage:

• Down 1.7% Today
• Down 5.6% This Week
• Down 14.5% 3-Months
• Down 2% YTD

In addition to the Chinese economic malaise, August U.S. stock market sell-off and current risk-off environment, and concerns about future iPhone growth, a few more specific concerns cropped up this week.

1. While the "record" 13 million+ iPhone initial weekend sales looked good on paper when reported Monday, analysts were quick to point out that this was not an apples-to-apples comparison given that last year's iPhone 6 number didn't include China. "On net, we believe that it is hard to conclude from Apple's first weekend sales whether iPhone 6S will eclipse last year's CY Q4/FY Q1 level, which remains investors' principal near-term focus: we see lots of puts and takes," Bernstein analyst Toni Sacconaghi said.

2. Apple announced that it will report fourth quarter earnings on October 27th, one week later than many had estimated. This could suggest the company had a weak quarter, giving analysts time to lower numbers ahead of the print. While not the most important quarter, with sentiment low investors don't want to see a rare "miss." Notably, this year's fourth quarter will only have two days for the iPhone refresh versus nine last year.

3. Today, Digitimes reported that suppliers of ICs are concerned Apple will adjust its chip orders for new iPhones lower in Q4. The report said a major analog IC supplier disclosed that Apple has slightly lowered its demand for supplies for new iPhones.

Now some good news.

1. The iPhone will be available for a full quarter in China in the December quarter (Q1) versus just about 10 weeks last year (i.e. - the company should "blow out" current Q1 estimates)

2. In a note today following a recent survey, RBC Capital analyst Amit Daryanani noted: 1) Consumers are more shifting towards higher memory configurations (16% intent to purchase 128GB vs. LY at 12%), 2) iPhone upgrade program is gaining more popularity as our survey shows 20% of users intend to use AAPL’s iPhone upgrade program (20% in total), 3) mix between 5.5” (6s+) remains healthy at 40% of total consumers intending to purchase the phone. (i.e. - iPhone unit growth in Dec-qtr calming investor fears)

3. Valuation is undemanding with a 11x forward P/E ratio (i.e. - the stock is too cheap)

The bulls and bears will likely be grinding it out in Apple until the company's earnings report on October 27th. The call should give clarity on a number of matters, including iPhone growth and China. Long-term investors may be wise to start adding to position here as downside appears limited, while upside ample.

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