Why Jefferies flipped its Apple bit from Neutral to Buy

Apple will maintain its dominant position in the industry’s most profitable market, says analyst Kyle McNealy.

From a note to clients that landed on my desktop Tuesday:

Apple’s “Franchise” iPhone Position Is Secure. Our analysis of ListenFirst digital/ social engagement metrics coming out of the iPhone 11/11 Pro launch shows brand engagement is higher than ever for Apple. ListenFirst’s Digital Audience Rating was higher for the iPhone 11 than the XS/XR launch last year and Samsung’s Galaxy S10 launch in February. We don’t see loyalty waning for Apple as the iOS platform creates incredible stickiness among customers. Also, most of industry profitability comes from the high-end of the smartphone market where Apple holds a dominant position.

A Significantly Expanding Services TAM. We think the Services opportunity is underestimated broadly by investors. The TAM [total addressable market] associated with Apple’s Services business is expanding rapidly as they add new offerings. In our view, Services expansion is also part of Apple’s logic for mid-range iPhone offerings. We estimate the annual Services revenue Apple generates from every active device will be $38 in FY’20. That’s up from $25 in 2017 and growing at 14%. Our iPhone units are ahead of the Street by 9m for FY’20 with most of these coming from the mid-range. If we assume these are mostly new iPhone users, Apple would make $342m in annual Services revenue off of these customers – or almost a point of services growth. We expect the total Services business to represent 20% of sales and 38% of operating profit in FY’20.

Raises rating to Buy from Neutral, raises price target to $260 from $210.

My take: This is a big (65 page) note. Jefferies is billing it as an “assumption” of coverage—rather than an upgrade—for a company they’ve been covering for years.

This series of pie charts says volumes:

why jefferies flipped apple

Click to enlarge.


  1. Fred Stein said:
    Kyle “discovers” what most of us have been saying for years. It’s a franchise.

    Apple’s profit means they can out-invest anyone in SmartPhones which is mature, but not stagnant, and in wearables, where the competition is a fragmented, zero-ROI mess.

    September 24, 2019
  2. victor castroll said:
    um, code for we’ve got too much inventory and we need suckers to sell it (our brokers) to even bigger suckers (our clients)

    brokers make you broker.

    more at http://www.MICAbear.com

    September 24, 2019
    • Gregg Thurman said:
      Followed the link twice. There won’t be a third time. You’re Welcome.

      September 24, 2019
      • victor castroll said:
        i guess you like loosing money.

        September 25, 2019
  3. Robert Paul Leitao said:
    Services attachment is much higher among owners of new iPhone handsets than among owners of legacy models. The market is apparently surprised by reports of strong early demand for the iPhone 11 handsets. Additionally, the big 5G upgrade cycle is now about 12 months away. The more new iPhone handsets sold this model year and next model year the higher the demand for Apple’s services moving forward.

    Brand engagement is higher than ever for Apple. I expect the price target to move higher as we move through the next six months and as Apple evidences continued strong growth in Services revenue.

    In my view, Apple is a $300 stock currently selling at about a 25% discount.

    September 24, 2019
    • Aaron Belich said:
      No, maybe the competition will be throwing out 5G handsets for the next 12-24 months, but Apple doesn’t need 5G next year. Maybe 2021, IF a decent use case for a 5G handset emerges. Now, there is none, and there’s nothing exciting that I’ve seen on the horizon.

      September 25, 2019

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