Credit Suisse initiates Apple coverage at $209

From a 60-page note to clients by analyst Matthew Cabral that landed on my desktop Thursday:

Apple’s iPhone business, which for 10+ years was the profit engine that propelled the company to the first-ever $1 trillion valuation, is becoming increasingly mature as users are holding onto their phones longer and the broader smartphone market reaches saturation (market units -4% y/y in CY18, the first meaningful decline ever). Against that backdrop, Apple is looking to transform itself into a more recurring, higher-growth, and ultimately higher-value business as it pushes to increasingly monetize its massive 900mn iPhone installed base through Services. We see potential in the shift, with Apple in an advantageous position to both provide the platform to connect third parties to iPhone users (App Store, for example, which we expect will rise to $21bn in sales by FY21) and expand its own proprietary services, including Apple Music, which now has over 50mn paid subscribers, as well as the newly launched TV+, News+, Card, and Arcade offerings (see page 26).

That said, it is still early in the transition relative to the magnitude of a staggering ~$140bn in iPhone revenue (CY19, per CSe). Near-term upside likely require the multiple to re-rate higher, as we do not believe Services alone is enough to move estimates meaningfully higher over the next 12 months. Investor perception of Apple as a hardware-centric company will be hard to shake, in our view, particularly against a backdrop of double-digit iPhone declines (CSe iPhone sales -12% y/y in CY19). With the stock up 40% from its January low and near a peak multiple (15x FactSet consensus CY20 EPS), we prefer to remain on the sidelines awaiting a better entry point and/or line-of-sight to significant Services-led upside to break out of the historical valuation range.

Neutral rating, $209 price target.

Two charts:

apple credit suisse initiates 209

apple credit suisse initiates 209

Click to enlarge.

My take: Credit Suisse has been without an Apple analyst since Kulbinder Garcha left in 2017 to manage tech investments for the Qatar sovereign fund. Cabral comes from Goldman Sachs, where he covered IT from 2014 to 2018. Not much in these 60 pages we haven’t seen elsewhere.

5 Comments

  1. Fred Stein said:

    Gaming delivers benefits, beyond the growing revenue:

    1) Drives the desire to upgrade to get the better screens and the A12 powerhouse to run the best games in the smartphone world.
    2) Keeps iOS as first choice for investment by Game developers.
    3) Combining 1 and 2 above brings kids into the iPhone ecosystem and sets preferences for a long time.

    3
    April 11, 2019
  2. Ralph McDarmont said:

    Sixty pages to declare himself inept?

    2
    April 11, 2019
  3. Dan Scropos said:

    A mature smartphone market? Sounds good to me. In essence, playing along with that thesis, Apple keeps all of its current users *and* the replacement cycle lengthens. Both scenarios play out extraordinarily well for Apple. The former is a no-brainer, but why the latter, you ask? As the smartphone cycles lengthen, iPhone’s exceptional durability shines through. We all compare *new* phones and specs. What happens to brands not named Apple when we begin to compare 3, 4 or 5 year old phones? They don’t stand a chance, folks.

    Let’s say the replacement cycle widens to 4 years. Apple sells approximately 225 million iPhones annually and the other brands are exploited, as their phones will more than likely hobble into year 4, not be working at all by then, or, if they do make it to year 4, have absolutely no resale value at that point. iPhones then become the *lone* choice in the secondary market.

    Apple is prepared for this maturing smartphone market. Whether or not it is mature, to me, is immaterial, although I believe it is not. The advance cycles have simply widened, but there are more great advances to come, and I believe Apple is once again poised to tell consumers what they want. And that breakthrough, without any doubt, is health monitoring. If there is one fundamental trait that all humans care about, it is staying healthy and living a long, quality life. Apple is ready to deliver advances that will lead that charge. Like Tom Cook said, this will be what they are remembered for.

    1
    April 12, 2019
    • David Emery said:

      I suspect hardware reliabiity is a contributing reason to Apple’s growth in laptops. I was on a project with extensive travel for most of the previous decade. I don’t think anyone else on that project had a laptop last for more than 2 years. My MB Pro -almost- made it to 3 years, when it got knocked over (no MagSafe on an ethernet cable.) I dropped it off at the Newport Beach CA Apple Store late Thursday, and picked it up at my home Apple Store in Tyson’s Corner VA the following Tuesday. Try that with a Dell, dude!

      Woot recently offered refurbished 2012 MBs and they sold out!

      1
      April 12, 2019
  4. Kathy Corby said:

    Yup. Took my flaking 6 year old MacBook Pro in to the genius bar last year to see whether the display could be repaired. Turned out Apple recognized the coating problem, apparently felt that even a 6 year old machine should look pristine, and replaced the entire upper part of the clamshell body — cost? $0. It still runs like a beast. Incomparable. And speaks to the analyst’s point that “Investor perception of Apple as a hardware-centric company will be hard to shake.” Why shake it? Services drive hardware sales, hardware drives services. Chicken or the egg? Who cares?
    Also note that note of these people pay attention to the Apple AR glasses around the corner of next year, the Apple car still likely in the making, and the healthcare remake. Not part of anyone’s estimate, apparently.

    1
    April 12, 2019

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