Why Katy raised her Apple target $4 to $166

“We are buyers heading into the iPhone 13 launch in September” — Analyst Katy Huberty

From a note to Morgan Stanley clients that landed on my desktop Thursday:

As we wrote in our June 23rd Apple report – Apple call volume for the majority of the June quarter was as low as we can remember over the last 5 years, driven by regulatory headlines and concerns that a more evolutionary iPhone “s-cycle” would extend iPhone replacement cycles and drive Y/Y revenue declines in FY22. AAPL stock performance for most of C2Q matched this sentiment. Despite posting record March quarter earnings in late April, shares underperformed the S&P 500 by 10 points from mid-April to early June (Exhibit 2). But since troughing at ~$123 in early June, Apple shares are up over 20%, outperforming the S&P 500 by 16 points. We’d attribute this to three primary factors.

First, there has been a general flight to quality big tech names in recent weeks, with AAPL, AMZN, FB, GOOGL and MSFT outperforming the S&P 500 by 8 points, on average, since early June.

Second, App Store growth accelerated in the month of June, to +17% (Exhibit 3), with most of the App Store’s largest markets showing a clear acceleration on both a Y/Y and 2-year stacked basis (Exhibit 4), supporting the view of secular services growth.

And lastly, iPhone supply chain data indicates iPhone builds are expected to grow at a mid-to-high teens percentage Y/Y in C2H21, which along with recent share gains further supports our view that iPhone revenue can grow in FY22, and refutes the concerns of iPhone s-cycle declines (see more below).

So, while share price performance post earnings may be more muted given Apple’s recent outperformance, we are buyers heading into the iPhone 13 launch in September, where we see the combination of mature replacement cycles, increasing 5G adoption, improving retail store traffic, longer battery life and camera quality, and share gains against Huawei as drivers of iPhone outperformance relative to past s-cycles.

Maintains Overweight rating and raises target to $166 from $162. 

Cue Exhibit 2:

My take: This is Huberty’s fourth Apple note and second target hike in three weeks. Think she’s trying to send a signal?

6 Comments

  1. Jerry Doyle said:
    Little doubt what I am going to write will offend some, but Katy the past year has been a day late and a dollar short in her understanding of Apple and getting it right.

    3
    July 15, 2021
  2. Michael Goldfeder said:
    Dan Ives has cast a large shadow.

    3
    July 15, 2021
  3. Mark Visnic said:
    Katy is a bean counter, more thoughtful than many of her peers but, a bean counter nonetheless. The analyst community needs a healthy injection of vision and broader perspective.

    3
    July 15, 2021
  4. Steven Philips said:
    Mark and Jerry: Katy does what she does and she does it well. This makes her perspective reliable and useful. Other perspectives can also be useful. Like “vision”. But one person’s “vision” can also go way wrong. None are absolutes. It’s up to us to filter what THEY say with our own judgment. OR follow the philosophy of A.E. Neumann. “What? Me worry?”
    And just keep holding AAPL! 🙂

    5
    July 15, 2021
  5. Ms. Huberty, thought-provoking as always. Her questions during Earnings Call are often ones I would ask.
    – Mature replacement cycles – SAH meant increased use, wear & tear & batt cycles. I see shattered screens on too many phones. Now many are making up for lost vacations. Replacement phones will be necessary by Fall.
    – 5G adoption – People with a 5G phone & service are raving about the experience , tower equip upgrades continue apace (I know people on the crews & that sell the antennas).
    -Improving retail store traffic – This is big in situations/places where people only buy big ticket items in-person & means more Apple Care sold as well.
    – Longer battery life – All seek this holy grail. New processors sip power
    – Camera quality – Nobody but me carries another camera (DSLR) now. Used to be pocket Canon, Epson, Kodak, Nikon cameras all around. Hi-Res video sharing is extremely popular. Clients even purchased prints from shots taken with my old iPhone X!

    1
    July 15, 2021
  6. Mark Visnic said:
    Steven, Analysts influence share prices unduly. If their analysis is limited, it will create inefficiencies in pricing. That isn’t necessarily a bad thing for those who aren’t unduly influenced by their limited analysis and form their own view. I’ve been a beneficiary of lower than fair value prices that are the norm and not the exception for Apple. Apple Treasury and, by extension, long-term shareholders, also are beneficiaries.

    Nonetheless, the limited analysis does have an impact. As one easy example, Apple should be trading at a premium to Microsoft, not a discount. The limited analysis by Katy, who, admittedly is among the better Apple analysts, is materially responsible for that multiple disparity.

    In sum, don’t misunderstand my point. Katy has an accounting-centric approach to Apple, hence the frequent minute changes to price target. Analysts largely have an accounting-centric approach to Apple. Not seeing the forest for the trees is their shortfall. An enterprise’s growth trajectory, and by extension, its share price trajectory, involves much more than that approach. It involves strategy, optionality, management track record and thoughtful assumptions about all of those factors.

    4
    July 15, 2021

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