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) $221 price target.
Our Blue Sky Scenario (US$) 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.