Credit Suisse: Blue/grey skies ahead for Apple

Analyst  Matthew Cabral could see the stock going to $287 or falling to $153, but he’s sticking with $221.

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

iPhone unit trends remain solid, falling ASPs a key offset: Nearly two months into the iPhone 11 cycle, data points continue to suggest a meaningful improvement in units y/y. Indeed, while the differing launch cadence skews the monthly comparison, government data suggests iPhone units are up 6% y/y in China over September + October combined.

Similarly, our tracking data suggests iPhone has yet to hit full supply/demand balance eight weeks post-launch (though it’s getting close, with wait times less than one week on >90% of SKUs); last year, all models achieved equilibrium within three weeks.

That said, falling ASPs remain a key offset driven both by the $50 y/y price cut on the iPhone 11 and mix skewing toward the lower-end of the portfolio (11 was ~20% of mix in C3Q, per IDC, vs. CSe 17%).

As for the stock, we’re on board with the idea that the shift toward Services deserves a higher multiple over time; however, we struggle with continued P/E expansion (now ~20x CY20 EPS vs. 5-yr avg of 13x and a prior peak of 17x since Jan 2010) seemingly led by firming iPhone data points rather than Services-driven upside.

Maintains Neutral rating and (all wet) $221 price target. 

apple credit suisse blue skiesMy take: I don’t know when it started, but Cabral now buttresses his official price target with blue and grey sky scenarios:

Our Blue Sky Scenario (US$) 287.00  Our Blue Sky scenario assumes a 150bp increase in revenue growth and a 25bp increase in gross margins. This yields CY20E EPS of $14.36 (4% upside potential to base-case EPS) on which we apply an 20x multiple to reflect a faster growth rate and potential increased willingness to view Apple as a Services company rather than just a premium smartphone vendor.

Our Grey Sky Scenario (US$) 153.00  Our Grey Sky scenario assumes a 200bp decrease in revenue growth, 50bps of downward pressure on gross margins, and a 50bpt increase in opex as a % of sales. This yields CY20E EPS of $12.78 (-8% vs. our base case EPS) on which we apply a 12x multiple, about one standard deviation below Apple’s historical average, to reflect a slower growth rate. This scenario gives the company little credit for the transition toward higher-margin Services.

7 Comments

  1. David Emery said:
    A 50% swing? Nothing like hedging your bets! The argument for the low case isn’t particularly credible, I just don’t see AAPL going back to a P/E of 12. Nor is the argument for a P/E of 20 as ‘the peak up-side’ particularly aggressive, particularly since that P/E is still below market average.

    That being said, credit to Cabral for actually displaying his reasoning, rather than the ‘rectal sampling’ we get from most ANALysts.

    1
    November 20, 2019
  2. Fred Stein said:
    Hey, it’s kinda cool, despite his low ‘base’ case PT. His blue sky case seems reasonable. The grey sky case really means black swan event, most likely triggered by external factors. He should call it what it is, not ‘grey sky’.

    His grey sky case fails to account for buybacks.

    1
    November 20, 2019
  3. Jerry W Doyle said:
    I listened last evening to an interesting podcast, “237 Herbie Rides Again, The Critical Path, November 17, 2019.” The guest interviewed was Horace Dediu who breaks down Apple earnings and explores real estate villainy. Anyway, Horace was explicit in his belief that Apple should be reflecting a P/E of 30 based on a recurring revenue model. He certainly believes Apple should have a P/E similar with MSF which now is around 28.

    3
    November 20, 2019
    • Greg Bates said:
      Just to nail those colors to the mast, at Horace’s 30 P/E I calculate a target of about $356. (Current price of $264 divided by current P/E of 22.22 multiplied by his expected P/E of 30.)

      0
      November 20, 2019
  4. Greg Bates said:
    This target strikes me as useless. $221 is EXACTLY half way between the grey sky low and the blue sky high. It reads like a prediction that can’t be wrong: the stock will either rise or fall–who can quibble with that? There is no analysis offered as to why the upside and the downside are perfectly balanced, which would justify the target. So this middle ground is kind of a safe harbor: if Apple’s price drops a bit or a lot–even as far as the Grey sky amount to $153–they can say, we told you so. If it rises any amount up to the blue sky $287, they can say, we called it.

    Cutting through the haze, the $221 target implies a drop of just over 17% from the $267 current price listed on their graph. It seems to me a clearer way to headline the analysis is: We expect Apple to drop 17%. That’s a claim one can make investment decisions on.

    Time will tell whether the claim is accurate.

    0
    November 20, 2019
  5. Gregg Thurman said:
    Funny thing about Cabral’s Blue Sky price target. The reasoning behind his $287 target requires Apple to perform as IT HAS GUIDED for the December quarter.

    Under Luca Maestri Apple has performed at or above top of range revenue for the past dozen or so quarters (excepting FQ1/2019). Maestri is my CFO God.

    3
    November 20, 2019

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