Why J.P. Morgan raised its Apple target $5 to $175

“We are adding Apple shares to the Analyst Focus List as a Growth idea as [favorable] data points… continue to trickle in.”

From a note to clients by analyst Samik Chatterjee that landed on my desktop today:

Increase to iPhone 12 builds corroborates our recently highlighted expectation for upside to the current cycle; low expectations for iPhone 13 creates another leg to the upside opportunity. Apple supply chain analyst, William Yang, is increasing his iPhone build forecast for CY21 by 9 mn to factor in resilient demand for current/legacy iPhones, even as he maintains his build forecast for the upcoming iPhone 13. We are increasing our iPhone volumes expectations modestly in conjunction with the raise to the build estimates, but more importantly, see a path to upside for the shares medium- term both on account of upside to iPhone 12 estimates as well as low investor expectations heading into the iPhone 13 launch. The combination of upside from iPhone 13, stemming from a better upgrade rate to 5G devices and a larger installed base, as well as upside from the launch of iPhone SE3 in calendar 2022 could set Apple up for an earnings upgrade cycle over the next 6-12 months.

Limited supply related headwinds to iPhone. As indicated in our recent report based on Wave 7 survey, relative to iPhone availability, there appears to be limited disruption on account of supply constraints, even as primary competitors are facing more sizeable headwinds on that front. As a reminder, Apple had guided to $3-$4 bn revenue impact from supply in F3Q; although, admittedly primarily in Macs and iPads.

Strength in Macs highlight continued product momentum. While the variance in the latest estimates from IDC and Gartner are notable, both highlight solid growth for Mac shipments in F3Q, with Gartner estimating growth of +20% y/y (vs. market of +5%) vs. IDC’s +9% y/y (vs. market of +13%), beating our prior estimate for a mid-single digit increase.

Maintains Overweight rating and raises target to $175 from $170. 

Cue Figures 1-4:

My take: I’ve posted this out of order. Chatterjee came in a day earlier and $9 higher than Katy Huberty. 

8 Comments

  1. Jerry Doyle said:
    If one read these analysts’ notes in isolation in the absence of knowledge of Apple, the company, then one would believe erroneously that Apple is solely a “hardware” company.

    4
    July 15, 2021
    • Mark Visnic said:
      Absolutely true. This now vocally bullish analyst community (as opposed to silently bullish or in the case of a few analysts, bearish) continues to demonstrate a lack of full comprehension of Apple’s business model, strategy, and operating levers.

      Jim Suva of Citi manifested solid bullishness yesterday on CNBC but, when he was asked about multiple expansion potential for Apple, he turned negative. His view is the consensus and is blind to the reasons why a rerating for Apple eminently is justified. They include: 1. the growth of services as a percentage of total revenues and the recurring (more predictable and certain) nature of services revenue; 2. the incessant growth of the installed base of products, which is both evidence of the tremendous brand identity and loyalty and the smoothing out of the upgrade cycle, bpth of which also support a more predictable recurring revenue model; 3. the immeasurable strategic optionality value of the outrageously large cash flow generation. This factor, of course, is exclusive to Apple by virtue of the fact that no other company has a constantly replenishing cash chest anywhere near the magnitude of Apple’s; 4. the pipeline of new products and services that is spawned by the cash flow capacity and the optionality that flows from it. By now, it is no longer a question whether or how Apple can develop “the next big thing.” It is clear they are constantluy developing the next big things (plural); 5. The earnings power of the massive capital allocation program.

      None of this is reflected in the street’s collective analysis sufficiently or at all.

      Until it is, Apple will remain a buy.

      8
      July 15, 2021
      • Kirk DeBernardi said:
        …and let us not forget another ingredient in the aforementioned mix…

        EXCELLENT management of all the above.

        Analysts seem to always give that one short shrift. (Or neglect to mention it.)

        😉

        0
        July 15, 2021
  2. Taiwan Semiconductor met earnings expectations:
    – Q2 profit up 11%, revenue up 28%
    – Expects Q3 revenue up 21-23%
    – Chip shortage for auto customers easing from Q3
    – Expanding in U.S. plant in AZ & building a fab in Japan.
    Apple is their largest customer. Getting auto chip production back up helps Apple’s image among the ruling class. They somehow twist Apple’s foresight in lining up semiconductors with the car chip shortage. It’s a logical stretch but leadership is known for those leaps.

    6
    July 15, 2021
    • TSM met expectations (did not exceed but expectations were high), revenue up 28%, projects ~21% revenue growth and yet TSM shares off ~6% or over $7/share. This scenario is strikingly familiar.
      I know this is not Apple, Inc., merely a key vendor, but they’re connected at the chip. Ahem.

      2
      July 15, 2021
      • Fred Stein said:
        TSM is another great long-term hold. More so with today’s dip.

        0
        July 15, 2021
  3. Fred Stein said:
    Slightly OT: We’re seeing record cash inflows to ETFs which currently own about 1/16 of Apple’s outstanding shares. (source Bloomberg news)

    One more driver of upside and one more protection against downside.

    1
    July 15, 2021
  4. Gregg Thurman said:
    One more driver of upside and one more protection against downside.

    They can flee just as fast as they came in.

    4
    July 15, 2021

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