Morgan Stanley hikes its Apple bull case to $190

But a trade war with China could upset the apple cart.

Wall Street is looking at Apple all wrong, Morgan Stanley analyst Katy Huberty tells clients in a 13-page note that landed in my inbox Sunday night. She writes:

The market is focusing too much on near-term supply chain noise and not enough on three potential catalysts: 1) iPhone supercycle led by China, 2) cash repatriation, and 3) US tax reform. Apple is a top US IT Hardware pick in 2017 with 26% upside to our PT, 61% upside to bull case.

Her supercycle theory—that iPhone sales in China will bounce back as soon as Apple delivers a new phone that looks different and moves the ball forward—is supported by fresh Morgan Stanley research that shows loyalty to Apple at the high end of the Chinese market to be remarkable stable.

Click to enlarge. Not looking right? Try the website. 

“High-end Chinese users are committed to Apple,” says Huberty, “but are waiting for a more meaningful change to the form factor to upgrade.”

Cash repatriation and tax reform are trickier, given the vagaries of the President elect. With $216 billion trapped overseas, Apple would be the biggest beneficiary of a Trump tax holiday. Trump-style tax reform would also be “particularly impactful” on Apple, says Huberty.  “Assuming a 15% minimum foreign tax rate and 15-25% U.S. corporate tax rate, Apple’s new blended tax rate would be 15-19% or 7-11 points lower than today.”

But Apple, with its vast Asian supply chain, might also be the biggest loser if tensions between Trump and China break out into a trade war.

If border adjustments are adopted, disallowing non-US based costs, the net impact to Apple’s tax rate is neutral to slightly negative in light of the fact most of its products are manufactured and assembled overseas.

Bottom line: Huberty is sticking with her $148 price target and raising her bull case to $190 from $180. Apple closed Friday at $117.91, just below its 52-week high.

One Comment

  1. Tom Wyrick said:

    The Morgan Stanley chart suggests that iPhone is perceived by Chinese consumers as significantly different than other smartphones — even the premium versions of other smartphones. Despite appearances, they are not comparable.

    The chart shows that Chinese buyers of Samsung phones largely purchased them for large-format display screens, so most of them (40/50) jumped ship to Apple when the larger-format iPhone 6 was released.

    The chart suggests that up-scale Chinese customers do not buy Chinese phones, even though they are tariff-free while iPhone is hit with a big tariff. Since these up-scale customers include Party members and their families, it seems unlikely that Chinese regulators would exclude iPhone from the Chinese market except in extreme circumstances. China would not single Apple out for punishment to score points against Donald Trump, because it is well-known that Apple and Trump are not on the same team.

    As the article notes, the chart suggests that consumer opinions are more or less constant in recent years. As though a Chinese moat exists around iPhone.

    This chart is a good thing to recall, the next time pundits and fake news outlets are spreading stories about iPhone’s problems in China.

    January 10, 2017

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