Why This Bad News for Apple Inc. Stock Might Be Good News

In a recent research report from Pacific Crest Securities (via Barron's), analyst Andy Hargreaves claims that current sell-side analyst estimates of how many iPhones Apple will ship in the coming quarter may be "too high," per his team's channel checks.

In particular, the Pacific Crest team estimates that Apple has ordered components to support the build of 50 million iPhones during its second fiscal quarter. Such build activity, the analysts note, is "consistent with [fiscal second quarter] sell-in of 55 million units, or slightly more if manufacturing yields are better than expected."

Given that this number sits below the analyst's own estimates of 59 million, and is likely below what most other sell-side analysts have baked into their models, it would appear on the surface that this is "bad news" for Apple stock.

What's interesting, though, is that Hargreaves believes that "buy-side expectations for [fiscal second quarter] iPhone units remain below sell-side." Many investors, per Hargreaves, are already expecting fiscal second quarter iPhone shipments to come in at 55 million, "with some anticipating [fiscal second quarter] units as low as 50 million."

"While we see risk to sell-side estimates, including our own, we believe Apple is much better positioned to meet buy-side expectations," writes Hargreaves.

Here's why the contents of this seemingly confusing research note could actually be good news for Apple stock.

What the heck are the "buy-side" and the "sell-side"? I have noticed that many retail investors often confuse the phrase "buy-side" with those bullish on a stock and "sell-side" with those negative on a particular stock (i.e., "buy rating" and "sell rating").

That's not actually the case.

"Sell-side analysts," according to an excellent definition given by Investopedia, are analysts that work for either a brokerage firm or a company that "manages individual accounts and makes recommendations to the clients of the firm."

Examples of such analysts include Andy Hargreaves of Pacific Crest, Ming-Chi Kuo of KGI Securities, Gene Munster of Piper Jaffray, and the other popular names that you often see in the media associated with stock "downgrades" and "upgrades."

"Buy-side analysts" on the other hand are usually analysts who work for entities that manage money (think hedge funds and mutual funds). Per Investopedia, these analysts "perform research and make recommendations to the money managers of the fund that employs them."

What does the Pacific Crest note mean, then?What Hargreaves was really saying in his research note is that expectations among those who actually make major investment decisions for iPhone sales are generally lower than those of the analysts whose jobs are to provide research.

This is potentially a positive for Apple stock because it suggests that relatively weak iPhone sales (relative to what the sell side is looking for) might already be baked into Apple stock.

This means that if Apple "disappoints" relative to sell-side expectations and its forecast for its fiscal second quarter implies iPhone unit shipments of "just" 55 million or so, the stock might not actually fall much, if at all. Additionally, if Apple is able to exceed buy-side estimates (and merely "match" current sell-side estimates), the stock could move upward following earnings.

Taking a longer-term view ...At this point, I think investor expectation around the current iPhone 6s/6s Plus cycle are fairly low, particularly given how robust the iPhone 6/6 Plus cycle was. I suspect that many longer-term investors will be willing to "forgive" a potential year-over-year decline in iPhone sales in the coming year with the expectation that things will improve in the coming year with the iPhone 7.

Even if Apple sees a year-over-year decline in iPhone sales for fiscal 2016, the real "tell" will be how Apple does with iPhone 7. With that release, Apple will have the benefit of weaker prior year sales (growth from a lower base is easier to achieve) as well as the tailwinds associated with a brand new phone design.

As long as Apple returns to growth during the iPhone 7 cycle, Apple shares should be fine. However, if Apple sees a decline in iPhone shipments during the current fiscal year and sees those declines extend into the coming fiscal year, then investors should start to get worried.

The article Why This Bad News for Apple Inc. Stock Might Be Good News originally appeared on Fool.com.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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