Why Bernstein raised its Apple target to (still wet) $225

“As per usual, Apple’s Q4 results are not of particular importance, but guidance is.” —Analyst Toni Sacconaghi

From a note to clients dated 10/23/19 that landed on my desktop Wednesday:

For FY 20, we have updated our FY20 revenue estimates and remain modestly above consensus (+2%), although our EPS is largely inline, due to incremental costs from Apple TV+. We are now 300 bps above the Street on Services revenue, which we expect to accelerate from +16% to +20% growth on the back of deferred revenue recognition from Apple TV+, and are over 10% above the Street on Wearables/other due to strong AirPods growth.

We underscore that (like last year) near-term investor sentiment is likely to be shaped by iPhone revenues, where we estimate that Apple will face a high single digit (perhaps 8%+) headwind to iPhone ASPs in FY 20 due to lower pricing and a mix shift to the iPhone 11, deferred revenue reallocations from iPhone to Apple TV+, and the rumored release /resultant mix shift to a new iPhone SE. As such, the key wildcard over the next 3-6 months is whether we see any weakness in iPhone units, either from continued elongation of replacement cycles, renewed macro / trade concerns, or worse-than-expected uptake of the SE 2.

On net, we are more confident in Apple’s ability to deliver upside to consensus revenues and EPS in FY 21 amid a 5G cycle than in FY 20 – for FY 21, we see a plausible path to $16+ in EPS (vs. consensus of $14.54), and while early indicators appear encouraging for FY 20, we remain uncertain about the ultimate strength of the iPhone 11 cycle and investors’ reaction, given the large headwind to ASPs, macro uncertainty, and the significant run up in the stock.

Maintains Market-Perform rating, raises price target to $225 from $205.

My take: Better late than never. Sacconaghi is a smart one. Interesting that he’s the only analyst I’ve seen who has given even a nod to Rod Hall’s concern about Apple giving away millions of years of free Apple TV+ to promote the new service.

See also: Watch Goldman Sachs’ Rod Hall defend his $165 Apple price target

3 Comments

  1. Fred Stein said:

    Many analysts scramble to raise or lower targets when AAPL’s price moves strongly up or down, accordingly.

    This is simply group think, nothing more, with rationales added as cover.

    A 12 month price target should be based on long-term fundamentals as in the next 24 to 60 months.

    0
    October 30, 2019
  2. Gregg Thurman said:

    The historic trend indicates an AAPL intraday low of $223 for the December quarter (occurring the week of DEC options expiry). Historically tomorrow will print this quarter’s intraday high. I’m not sure we can rely on AAPL’s historic trend this quarter, given the probability that Apple will establish a new revenue record during the period, despite trade and FX headwinds.

    I’ll be watching how much Apple TV+ revenue Apple defers in the January earnings report. This might give us an idea of how many new promo subscribers the Apple TV+ promo generated.

    0
    October 30, 2019

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