Pacific Crest Recommends Apple Stock, But Still Wary Of Its Suppliers

Andy Hargreaves of Pacific Crest laid out the case for investors to hold an Overweight position in Apple Inc. AAPL, but hold a cautious view towards the companies that make up Apple's supply chain.

Hargreaves noted that easing comps and increased replacement volumes should yield improved iPhone unit growth through the iPhone 7 cycle. In addition, strong anticipation for the 2017 iPhone cycle should help boost Apple's stock towards the $121 level over the next 12 months.

"Recent stock appreciation has captured much of the near-term upside that we anticipated related to the iPhone 7 cycle," the analyst wrote. "However, we continue to recommend owning AAPL based on downside protection from valuation, the likelihood for improving growth rates, and the potential for another leg of appreciation from growing replacement volume through 2017."

Despite recommending Apple's stock, Hargreaves stated that Apple's component supplies will "struggle to outperform" in the bottom half of 2016 as component orders are likely to be lower by 15 to 20 percent on the iPhone 7 compared to the iPhone 6s.

There are a few exceptions as the analyst holds an Outperform rating on Analog Devices, Inc. ADI, based on an order recovery in communications infrastructure in 4G, and Broadcom Ltd AVGO, as the company is best positioned to benefit from content increases in the iPhone 7 due to the transition to 3-channel carrier aggregation.

The analyst is also Overweight on InvenSense Inc INVN given the rise of popularity in Pokemon Go and augmented reality which will create a "significant growth opportunity" for the company, especially in midrange smartphones.

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