Merrill Lynch: Look what Monday’s Apple upgrade stirred up

Significant controversy remains over Apple’s long-term trajectory.” — Analyst Wamsi Mohan

From “Ten points made by the bulls and bears following our upgrade,” a note to clients that landed on my desktop Tuesday:

Key points made by the bulls: The Bulls see (1) negative estimate revisions likely behind us, (2) comps easier over next 12 months, (3) any trade deal with China will be a positive, (4) Street does not understand that the residual value of iPhones will drive higher replacement rates as buyers get more for trading in old phone, (5) iPhone unit expectations probably too low at this point (F20/F21), (6) not a top line growth story, but rather an income story with optionality, (7) potential large new buyback authorization in April vs. in years past, (8) Apple has second highest free cash flow yield amongst large cap tech, (9) valuation compelling, and (10) stock is significantly underweight and has a lot of room to benefit from positioning.

Key points made by the bears: The bears see (1) Call is too early, 2H19 estimates still too high given lack of innovation, (2) incremental iPhone features unimpressive till 5G phone launch in 2020, (3) concerns over services revenue growth, (3) 30%/70% revenue split between Apple and developers on the App store may cause more Apps to disintermediate Apple, (4) if competing phones lower price, Apple estimates may need to come down more and Apple may lose share, (5) Channel inventory down. Would rather position in AAPL exposed semi/supply chain companies for inventory led rebound, (6) to drive iPhone demand, Apple will need to reduce prices further (7) Apple is not investing enough to compete with Netflix or Amazon in content (8) lower iPhone ASP in regions that are growing, (9) expect gross margin (GM) to remain under pressure given price cuts, (10) replacement cycle continues to lengthen, and long-term smartphone penetration near peak level.

My take: That about covers it. No wonder the stock is so volatile.

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