Evercore Equity Research analysts Rob Cihra and Edison Yu rate Apple Inc. (NASDAQ:AAPL) as Overweight as they see so many small catalysts that the law of large numbers seems to indicate that at least a few of them will be big winners. The report reads as follows:
Factors behind Apple’s growth
“While its growth over the past decade has been driven by home run products (iPod, iPhone, iPad), the law of large numbers makes it seem more likely Apple Inc. (NASDAQ:AAPL)’s growth may now come from singles. With CY13 revenue of $174B second only to Samsung’s $206B and Apple Inc. (NASDAQ:AAPL)’s net profit of $37B still $10B higher than Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930)’s, there may be few incremental markets Apple might disrupt in the same way iPhones ($93B revs) did cell phones or iPads ($33B revs) are doing to PCs, since we also expect Apple to stick with its M.O. of creaming off only the high ends of each market it addresses.
But while there may not be another iPhone that adds 50% to revs, we see multiple impending products that could ultimately each add an incremental 5%, including wearables/iWatch (e.g., 10% attach to 300mil iPhone installed base x $299 ASP would be $9B or +5% to revs, and make it a mid Fortune 500 co. alone), >12″ iPad Pro targeting enterprise (en route to Mac/iOS integration) and iTV/home gateway (we still expect set-top+services not full-blown TV, but tripling today’s 10mil/yr Apple TV units and ASP to $299 could make iTV another $9B/5% biz).
New opportunities in advertising and ecommerce can extend monetization of Apple Inc. (NASDAQ:AAPL)’s high-end demo, 600mil iTunes accounts and deep ecosystem (see our 12/13 report Monetizing the Thin-Client Candy Store). We est its App Store for example already accounting for >5% of Apple’s CY14 profit, nearly 2X iPod+iTunes. We think this matters because a) Apple’s being valued for no/negative growth, b) we see Apple sticking with its premium vs. mainstream/lower-end model, c) its thin-client iOS ecosystem and integrated hardware+software+services offers a unique closed-loop platform to add recurring profit streams and d) valuation effectively embeds a call option just in case another home run does come.
Estimates for Apple earnings
Nearer-term, Apple Inc. (NASDAQ:AAPL) will report its Mar-qtr (FQ2) on Apr 23 and we’d own the stock into it, with our ests continuing to include 37mil iPhones and 18mil iPads but likely higher-end mix helping GM (est 37.8% just -10bps Q/Q on improved mfg. yields and +30bps Y/Y for first time in 7 qtrs) and EPS upside from buybacks, putting us at $43.8B/ $10.28 vs. cons. $43.7B/$10.14. We expect seasonal lull in the Jun-qtr (<consensus) but then meaningful ramp into larger-screen 4.7” iPhone 6 cycle coming late-Sep. GMs remain a key focus but we think Apple maintains some unique pricing latitude for iPhone 6 vs. Android OEMs.
We also anticipate NAND cost swinging back to help from hurt this yr, with flash pricing back down >20%Y/Y in CY14 vs. <20%Y/Y in CY13. Remain OW with our $670 price target based on an EV/FCF still just 8x CY15E and P/E 15x or 10x ex-projected cash.
Apple’s Valuation
Our Apple Inc. (NASDAQ:AAPL) price target of $670 uses a 8x EV/FCF on CY15E, equivalent to a P/E of 15x and just 10x ex-projected cash. Apple has traded at a forward P/E averaging 15x over the past 5 years, within a wide range of 9x-27x, with our current target multiple accounting for more moderate growth but also higher cash/cash returns.
Risks for Apple
We see Apple Inc. (NASDAQ:AAPL) risks as including its exposure to premium-priced consumer IT markets and revenue/profit concentration from just a handful of key products, particularly its iPhone. Competitive risks include pricing and margin pressure from lower-priced global suppliers. We believe Apple-specific risks also still include its future product strategies/pipeline post the passing of former CEO and visionary, Steve Jobs.”
