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.
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.