iPhone Sales Will Recover By 2017; Credit Suisse Maintains Outperform

• The share price of Apple Inc. AAPL has declined 11.5 percent over the past one year, to a low of $96.30 on January 21.
• Kulbinder Garcha of Credit Suisse has reiterated an Outperform rating on the company, with a price target of $140.
• Garcha believes that the stock is inexpensive, given the company’s powerful ecosystem, sustainable revenues and meaningful capital return.

Analyst Kulbinder Garcha mentioned that following a lot of market speculation, “Apple finally confirmed that the iPhone business may enter a period of decline with its March quarter guidance.”

However, Garcha also believes that following the decline in the March quarter, iPhone units would gradually recover, with an estimated 202 million units for the calendar year.

“While we see a subdued iPhone cycle for the next few quarters, we believe units will recover to 228.1mn in CY17 and remain constructive LT given installed base growth, high retention rates and a normalization in replacement rates,” Garcha explained.

Apple’s installed base growth is expected to drive upgrades and replacement with the iPhone 7 cycle.

According to the Credit Suisse report, several factors could impact gross margins over the next 12 months, including the iPhone 6s cycle being a lower gross margin one than the iPhone 6 cycle, lower mix of 5.5 inch screens in the iPhone 6s Plus, negative leverage and currency.

However, “this is being somewhat offset by a shift towards higher memory, improving Watch margins and the iPad Pro,” the report said.

Given the company’s high retention rates, multi-product compute advantage, superior ecosystem and a 1 billion strong installed base, Garcha believes that the company could generate sustainable, “annuity type” free cash flow of $60 billion per annum.