Wedbush initiates Apple ‘best idea’ coverage at $310

Analyst Daniel Ives, lately of GBH Insights, says Tim Cook is sitting on a gold mine.

From a note to clients that landed on my desktop Thursday afternoon:

Cook & Co. Focused on Services Gold Mine; iPhone Cycle Humming—Initiating at OP: With September Street numbers and FY19 set up well heading into a potentially robust iPhone product cycle along with a massive capital return strategy already in place as another tailwind, we continue to believe Apple shares are compelling over the coming year despite the recent run.

In particular we continue to believe the “high octane fuel” from the services business that is on a trajectory to be a $50 billion annual revenue stream by 2020 speaks to the stepped-up monetization of Apple’s unparalleled installed base that is front and center for Cupertino (and its investors) over the coming years.

Our sum-of-the-parts valuation on AAPL translates into a price target of $310 with our services business segment valuation between $400 billion to $450 billion and the rest of Cupertino’s core iPhone franchise resulting in a valuation that has clear upside from current levels in our opinion as Cook & Co. further execute on their long term consumer vision.

In a nutshell, we ultimately believe AAPL’s valuation can approach the $1.5 trillion level based on our analysis of the monetization potential of its unparalleled consumer installed base over the coming years coupled by further multiple expansion around the services business.

Initiates coverage with Outperform rating and $310 price target. 

My take: The last time I heard from Ives, two and a half months ago, he had a Highly Attractive rating on Apple and a price target of $245.

10 Comments

  1. Jonathan Mackenzie said:

    I agree that Apple could be a 1.5T company, although I think that may take some years. But here’s some interesting math. If in 7 years, Apple is a 1.5T company and they reduce their float to 3 billion, you’re looking at 500 per share.

    Could AAPL more than double over the next seven years? Even if it falls short, the trend is obvious. Huge cash flows and falling share count… very positive for long term investors.

    1
    October 19, 2018
    • Gregg Thurman said:

      Rule of 72: divide 72 by factor/rate to get number of years required to double principle. Apple revenue is growing at ab average rate of 29% for the past 7 years. There is no reason Apple won’t continue to grow at that rate for the next 3 years. 72/29=2.48. Seven years @ 29% is entirely doable.

      Seven years @ 10% would just about be guaranteed.

      1
      October 19, 2018
      • Jonathan Mackenzie said:

        I’m not comfortable assuming revenue will continue to grow at such astounding rates. I don’t mind being wrong when it’s to the upside! But I think what makes AAPL so appealing is that even if you model flat revenue, it funds an insane amount of buybacks and dividends.

        Obviously if Apple’s revenue really were flat, the stock would sport a conservative PE, but then AAPL’s PE has long been lower than peers and market averages. But it could go lower, of course.

        If you assume flat revenue over the next seven years and put a chunk of FCF into buybacks each year, you could give AAPL a PE of 10 and still not have to worry about the share price caving. I don’t have the exact share price handy. I did a spreadsheet on this once, and it’s worth updating. Not many stocks are valued so conservatively especially in today’s market. If you believe Apple’s revenue will grow AT ALL over the next seven years, the stock looks as cheap as it’s ever been. Net cash neutral is going to be epic over time.

        The only real risk to AAPL is falling revenues. I have tried to think of ways that Apple’s revenue might actually decline over some long period (like the seven years I have been using here).

        The two reasonable risks I have settled on are:

        A product disruption that Apple doesn’t see coming and refuses to embrace (c.f. Blackberry and the virtual keyboard), or

        A new product flop that is so bad it damages the brand. This damage would have to be severe enough to make lots of folks feel embarrassed to have chosen an iPhone.

        These are the only ways I can imagine that Apple’s revenue actually sinks. You could add global economic disaster, but I am not sure it would really impact Apple as much as some others and anyway it implies that any stock is a bad idea, so it doesn’t do much to differentiate the risk of owning AAPL.

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        October 19, 2018
        • John Konopka said:

          I think revenue grows when you find new markets or new products attract new business. Eventually the growth falls and you achieve a steady state (hopefully).

          If you accept the possibility of a downside you should also accept the possibility of an upside.

          A-series based MacBooks, glasses of some sort, an automotive related product are all possible. Maybe not home runs but solid hits.

          The news that Adobe is bringing a full version of Photoshop to the iPad is amazing news. It points to the iPad being more of a mainstream product.

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          October 19, 2018
  2. Martin Beutling said:

    Take some years? No way.
    1,5 T means a share price of roughly 300$…..I see that in 2019 or first half of 2020….

    Hell, the week before last week they already reached 1,1 T market cap, so that shouldn’t be such a big problem

    1
    October 19, 2018
  3. Gregg Thurman said:

    If Ive’s $310 target is a true one year then Apple’s market cap will be just short (accounting for share count reduction) of $1.5 T this time next year.

    Given his PT at Wedbush vs his recently released target at GBH could it be that GBH management was handcuffing him?

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    October 19, 2018
    • Gregg Thurman said:

      P.S., My one year PT is $336 generating a PE of 21.00. Current PE (today’s Intraday high) is 20.043. AAPL’s all-time high generated a PE of 21.148.

      1
      October 19, 2018
      • Jonathan Mackenzie said:

        I’d be happy with 250 in a year. AAPL had quite a run to 230 and it wouldn’t surprise me if it falls a bit more from here and spends some time bouncing between 200 and 230. I’ll be delighted if this time next year, AAPL has achieved new all time highs.

        I don’t understand why a stock like this would get treated this way, but that’s not the same as thinking it won’t happen. Most of AAPL’s price history is a puzzle to me. The stock is chronically under appreciated. But that’s also why I like it.

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        October 19, 2018

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