Stifel analysts Aaron C. Rakers, Sanjiv R. Wadhwani, Joseph Quatrochi, Andrew Shinn and William C. Peterson rate Apple Inc. (NASDAQ:AAPL) as a Buy, as they provide an outlook on Verizon Communications Inc. (NYSE:VZ)’s earnings and increase in iPhone activations.
Verizon earnings
Verizon Communications Inc. (NYSE:VZ) reported its 4Q13 results, from which we highlight the following wireless trends: 1.) Verizon reports that it had 8.8 million smartphones activated during 4Q13. We believe Verizon’s smartphone activations for 4Q13 could be viewed as a disappointment, given this compares to 9.8 million activations in the year-ago quarter (-10% y/y). This also equates to an ~16% sequential increase, which we believe investors will compare to Verizon’s smartphone activations increasing by approximately 38% and 44% sequentially in 4Q11 and 4Q12, respectively.
Apple’s iPhone activations
In order for Apple Inc. (NASDAQ:AAPL)’s iPhone activations to be flat y/y, we would note that this would imply a needed ~70% shipment share of Verizon’s total smartphone activations, which compares to ~55% ship share on average over the past four quarters (albeit we note a mid-60% share in 4Q12). Verizon Communications Inc. (NYSE:VZ) has historically provided a specific iPhone shipment share during its conference call.
Verizon Communications Inc. (NYSE:VZ) has accounted for ~11% of Apple Inc. (NASDAQ:AAPL)’s total quarterly iPhone shipments on average over the prior eight quarters. As a reminder, Verizon had reported a backlog for iPhone exiting 3Q13. 2.) Verizon reported 9.0 million 4G LTE device activations (smartphones + tablets). 3.) Verizon exits 2013 with smartphone penetration standing at 70% of the company’s total postpaid wireless subscriber base, an increase from 58% exiting 2012 and 67% exiting 3Q13. Verizon’s retail subscriber base stood at 102.8 million exiting 2013, versus 98.2 million exiting 2012. 4.) Verizon reported that 7.4% of its retail postpaid base had upgraded in 4Q13. While this is an increase from 7.0% and 6.9% in 2Q13 and 3Q13, respectively, we believe investors could focus on this as being down from a 10% and 9% retail postpaid base upgrade rate in 4Q11 and 4Q12, respectively.
Price is as of the close, January 17, 2014.
Target price methodology/Risks for Apple
Our $650 target price reflects a weighted valuation methodology using a 13x P/E, ~8x EV/EBITDA, and 12x EV/FCF multiples on our FY15 estimates, as well as a modest weighting to our 10-year discounted cash flow model, using a ~9% WACC and a low double-digit revenue growth rate over the next couple of years, followed by a low single-digit growth rate thereafter. Risks to our target price include: (1) Reinventing product momentum – can Apple Inc. (NASDAQ:AAPL) sustain current level of product innovation?; (2) Emerging competition for Apple Inc. (NASDAQ:AAPL)’s iPad and MacBook Air; (3) Wireless carriers looking to push back on iPhone subsidies; (4) Slowdown in Chinese growth impacting expanding operations in the country; (5) Legal disputes (e.g. Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) tablet litigation); and (6) Execution missteps.
