Merrill Lynch: Wall Street ‘too pessimistic’ on Apple

Apple’s current share price, says analyst Wamsi Mohan, assumes declining future hardware sales.

From a note to Bank of America Merrill Lynch clients that landed in my inbox Thursday:

Valuation cushion is ample: Although we acknowledge the importance of the iPhone to the overall Apple story, in our opinion, investors are taking too pessimistic a view on the future of the company. Our DCF [discounted cash flow] based analysis suggests that cash ($19) + services (base case of $57) + Hardware ($103 implying no growth) leads to an overall value of $179, which leaves ample room for upside and risk reward is to us compelling. Given the stock is trading at $168, in our opinion the stock is already discounting a declining hardware business and much worse than run rate services business, which is too pessimistic in our opinion.

Figure 1 shows our Bull and Bear estimates for the stock price applying various assumptions of revenue growth and operating margin.

too pessimistic merrill lynch

Click to enlarge.

Maintains Buy rating and $220 price target. 

My take: Mohan doesn’t address this week’s iPhone X rumors. Most of his 20-page note is a deep dive—worthy of Horace Dediu—into the components of Apple’s Services revenue stream. Lots of cool charts. My favorite: Figure 29, which tracks the podcasting boomlet:

Merrill Lynch podcasting

Click to enlarge. 

One Comment

  1. George Row said:
    “Mohan doesn’t address this week’s iPhone X rumors.”

    Well I think that is a pretty balanced approach on his part and treats the rumours with all the respect they deserve.

    February 1, 2018

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