Apple's Setback Creates Opportunity; Credit Suisse Maintains $150 Share Valuation

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Apple Inc. AAPL announced weak F2Q16 results and soft F3Q16 guidance. Credit Suisse’s Kulbinder Garcha reiterated an Outperform rating for the company, with a price target of $150. Recent pullback in shares offers a buying opportunity.

Apple reported its F2Q16 revenue at $50.6bn, representing a 33.4 percent sequential decline, short of the estimate of $52.1bn. The company’s EPS came in at $1.90, also missing expectations of $2.00.

Apple announced weaker-than-expected guidance for F3Q16. The EPS estimates for FY16 and FY17 have been reduced to $8.18 and $9.64, respectively, reflecting an inventory drawdown, lower GMs and higher opex.

Near-Term iPhone Weakness

Apple’s March iPhone units came in at 51.2mn, slightly higher than expectations, but the company indicated continued challenges due to “macroeconomic weakness, channel inventory drawdown, as well as a subdued product cycle, all of which we believe is largely transitory,” analyst Kulbinder Garcha commented.

Garcha projected iPhone units of 40.7mn for June, representing a 14.4 percent y/y decline, reflecting an inventory drawdown impact. While the iPhone cycle is likely to remain subdued for the next few quarters, Apple’s iPhone business is expected to recover in CY17. The analyst projected 227mn units for CY17, citing “installed base growth, high retention rates and a normalization in replacement rates.”

Valuation Support

“Acknowledging near term weakness, we believe this reset provides an opportunity,” Garcha said, while adding that Apple could sustain FCF of $67bn in the long term, backed by Services growth and an installed base that could grow to ~1.4bn.

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Posted In: Analyst ColorLong IdeasReiterationAnalyst RatingsTrading IdeasCredit SuisseKulbinder Garcha
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