Why Morgan Stanley raised its Apple price target to $199

Biggest surprise: The strength of demand for the new Apple Watch.

From a note to clients by Katy Huberty that landed in my inbox Wednesday:

We raise our FY18 Apple Revenue and EPS estimates 2% and PT to $199 (from $194) on the back of AlphaWise survey of US smartphone users highlighting 1) pent-up iPhone upgrade demand, 2) increased retention/switcher rates, and 3) surprisingly bullish Apple Watch demand.

Zeroing in on the Apple Watch demand:

Apple Watch demand the biggest positive surprise – potentially doubling revenue by 2019. While iPhone contributes the majority of revenue and profits, Apple Watch is growing in importance, potentially doubling revenue contribution to Apple top-line in the next two years. Twenty-one percent of US survey respondents and 29% of US iPhone owners plan to purchase an Apple Watch in the next year. Additionally, over two-thirds expect to purchase the Watch with cellular functionality, putting upward pressure on ASPs. While we recognize that the consideration to purchase an Apple Watch does not necessarily translate to a purchase we see an upward bias to Street Apple Watch forecasts and raise our FY18 shipments to 30M, from 25M, noting the potential for more than 10M upside even on this higher base.

Below: How Morgan Stanley got to 262 million iPhones and 30 million Apple Watches for fiscal 2018.

Apple Watch estimates Huberty Morgan Stanley

Click to enlarge.

Huberty maintains her Overweight rating and, as noted, raises her price target to $199 from $194. 

4 Comments

  1. Fred Stein said:

    Thanks Katy, Nice target backed up with a financial model. She shows courage and hard work.

    By contrast, the low target analysts just recycle rumors or memes with no financial models.

    1
    October 11, 2017
  2. John Kirk said:

    Successful investing is about having people agree with you … later. ~ James Grant

    If you thought the Apple Watch was a success while everyone else thought it was a failure you might have successfully invested in Apple during its downturns. If you waited until now to figure out that the Apple Watch is a success, you’re not giving investment advice, you’re a belated historian.

    2
    October 11, 2017
  3. Robert Paul Leitao said:

    At 30 million units, Katy Huberty is suggesting revenue from the Apple Watch line in FY2018 will well exceed $12 billion dollars. Were it a standalone enterprise, at that level of revenue the Apple Watch would enter the top half of Fortune 500 companies next fiscal year, rivaling the revenue of enterprises such as Micron Technology, Western Digital and Kinder Morgan.

    At an estimated 262 million units (more than one-quarter billion iPhones to be sold), revenue from the iPhone line would push the company’s total revenue in FY2018 far beyond that of Berkshire Hathaway, the nation’s largest conglomerate.

    At $199 per share, the company’s market cap would break through $1 trillion. Based on Ms. Huberty’s narrative, the only curious thing is why she kept her price target at just under $200.

    0
    October 12, 2017

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