Why Analysts Remain So Positive on Apple After WWDC Revelations

For the iPhone super-cycle, Garcha said:

The iPhone 8 super-cycle. We see a number of features and upgrades, including an OLED screen, full glass display, no home button, enhanced Taptic Engine, improved camera, and wireless charging in the iPhone 8. While this is some time away, we believe the iPhone 8 will be feature and specification rich.

These features, coming potentially in September 2017 and even if in just a Pro version of the device, should drive an accelerated replacement cycle and draw in new users and should result in mix improvements. As such, we now assume iPhone units in CY18 of 250 million, up 16.1% year over year, ASPs of $667 and conservatively model gross margin at 39.0%.

S&P reiterated its Strong Buy rating on Apple, along with a $130 price target for the coming 12 months. S&P said:

As expected, Apple offers updates to all 4 of its major platforms. WatchOS (i.e. new scribble feature) and tvOS (Siri enhanced search capabilities, single sign-on, and new TV remote app) saw incremental updates. The macOS provided a bigger update, with the addition of Siri, picture-in-picture, optimized storage, auto unlock, and copy/paste between devices.

Key iOS updates include Siri/Maps/Messages integration with third-party apps, major enhancements to Messages, Music/News revamp, enhancements to Photos, and a new app called “Swift Playgrounds” to help people learn to code.

Wells Fargo has an Outperform rating. Maynard Um has a valuation range more or less in line with the consensus at $120 to $130. That is based on only 10 times the firm’s 2017 free cash flow target. Um sees more deeply integrated and open ecosystem as having been the key narratives. He said:

While many have talked about Apple’s captive ecosystem, this year’s WWDC highlights the deeper integration across its hardware portfolio. For example, the ability of the Watch to unlock a Mac or the ability to cut content from an iPad and paste it into a Mac. We believe this cross device functionality/utility could help drive further hardware sales across its portfolio (halo effect).

Additionally, Apple finally opened up parts of what have traditionally been a fairly closed ecosystem – opening up Siri, Messages, Maps, etc – which we think should drive greater utility, innovation, and convenience once more developers get on board. While the lack of new hardware could be viewed as a disappointment, new hardware across the portfolio could be coming with the new iOS, WatchOS, MacOS, and tvOS updates in the fall, setting up for the holiday season.

Wells Fargo’s investment thesis noted:

We believe the risk/reward at 8-times our free cash flow is tilted favorably with investor sentiment likely reflecting potential first-half softness and our view that iPhone shipments have not peaked and would increase year over year in December 2016.

Some other analyst calls were made going into the WWDC conference.

Piper Jaffray had an Overweight rating and a $153 price target. The firm’s Gene Munster:

Overall, we view WWDC as a warm up to more meaningful announcements in the fall including iPhone 7 and an updated Apple Watch. AAPL remains our top large cap pick with a $153 price target and continue to believe investors will look favorably at easier comps starting late this year.

JPMorgan’s Rod Hall and team have an Overweight rating and $125 price target. That target is down from $141 in January and from a peak of $145 in most of 2015.

RBC Capital Markets had an Outperform rating and a $120 price target. The firm’s Amit Daryanani and Mitch Steves saw multiple AppStore changes aligning well with Apple’s overall strategy to grow service revenue/installed base related revenue. The RBC team said:

We think Apple is poised for a near-term rally but within the range of $90.00 to $120.00. While we realize that elongating iPhone cycles would keep a lid on revenue/EPS growth for Apple until we get an innovative iPhone iteration in Fiscal Year 2017, we think iPhone 7 will at minimum drive stable and mid-single digit unit growth. Simplistically, we think it is prudent to look at iPhone growth over 2-year cycles versus extrapolating one year trends too far up (iPhone 6) or down (iPhone 5c and 6s?).

Apple has a 52-week trading range of $89.47 to $132.97. The market cap is $538 billion.

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