Technology

Why Analysts Remain So Positive on Apple After WWDC Revelations

Jon C. Ogg

Published: June 15, 2016 11:25 am

Last Updated: January 13, 2020 6:46 am

Many investors and analysts alike — oh, and consumers of course — keep a close eye on every one of Apple Inc.’s (NASDAQ: AAPL) new efforts ahead of, during and after the Worldwide Developers Conference (WWDC) each year.

24/7 Wall St. has tracked multiple analyst reports. The rate of bullishness is not universal here, but many positive targets remain in place for higher upside in 2016 and 2017.

Apple shares closed Tuesday at $97.46, and the trading on Wednesday was up 0.9% more at $98.34 ahead of the FOMC decision on interest rates.

Apple’s consensus analyst price target was listed as $124.93 on Wednesday. This is down handily from the consensus target of $148 at the start of 2016 when 24/7 Wall St. issued its 2016 bullish and bearish outlook for the stock.

Again, many analysts have chimed in on the heels of the WWDC. Most see upside, even if their formal ratings have not changed significantly in any direction at all.

Argus reiterated its Buy rating, as well as its $135 price target after the WWDC was evaluated. Argus said that the current capital return and ongoing work in new areas lead it to believe that Apple’s positives are not fully reflected in the share price, noting that it is attractive on a price-based and free cash flow valuation analysis.

Argus values Apple at 11.4 times its 2016 EPS forecast and at 10.6 times its 2017 forecast. The firm pointed out that the five-year trailing multiple is 13.1. Over the past five years, Apple is said to have traded an average 10% discount to the market multiple. Argus did leave room for much more upside than its formal $135 target, by saying:

Our more forward-looking, two- and three-stage discounted free cash flow model renders a value north of $250 per share. Our blended fundamental valuation model points to a price above $225, in a slightly declining trend. Appreciation to our 12-month target price of $135, along with the dividend yield of about 2.2%, implies a risk-adjusted total return exceeding our 12-month forecast for the broad market.

Merrill Lynch has Apple rated as Buy with a $120 price objective. Merrill Lynch made a key change to its Equity Core Portfolio, adding Apple after the LinkedIn acquisition allowed that stock to be replaced on this list. Merrill Lynch’s Cheryl Rowan added 1% to the firm’s 3% weighting. Her note said:

We are also adding to our current position in Apple, as the pullback in price gives us an opportunity to lower our cost basis on shares of this industry leader. Apple’s app store changes have the potential to drive more predictable revenue growth, in our view. Apple is making Siri a larger part of the ecosystem. It will now run on Macs, and can help users open Apps, search the web and send text messages. In iOS 10, Apple has made Siri open to developers for integration into 3rd party Apps. Artificial Intelligence/deep learning is being used to make Apps smarter and more useful (sorting photos by themes, suggesting alternate routes during trips, places to eat and controlling home devices).

Merrill Lynch’s Wamsi Mohan is the analyst who formally rates Apple with the Buy rating and $120 price objective. On the heels of the WWDC news, Mohan said:

We attended the Apple WWDC keynote, which highlighted features of upcoming versions of iOS, macOS, watchOS & tvOS. In our opinion, faster watch OS Apps and Apple Pay on the web are significant enhancements which can drive incremental usage. Siri, Maps and iMessages are now open to developers. Siri will be available on Macs and can be integrated into 3rd party Apps.

Mohan’s investment rationale states the reason for the upside as follows:

We rate Apple a Buy on potential upside from 1) Continued long-term opportunity in China, 2) potential share gains from the release of a lowerend iPhones, 3) strength in the upcoming iPhone 7 cycle, 4) optionality in cash balance. Risks are: 1) Upcoming deceleration in iPhones after a strong product cycle 2) development of new revenue sources like Apple Pay, Apple Watch, home/health kit, etc., that will take time to mature.

Credit Suisse maintained its Outperform rating and $150 price target, factoring in a muted iPhone 7 and the iPhone 8 super-cycle. The firm’s Kulbinder Garcha said:

As details emerge earlier than usual, we now factor in the impact of the iPhone 7 and iPhone 8 (rather than being called the 7s). We conclude that the iPhone 7 will prove to be a modest upgrade, with significant innovations pushed out to the iPhone 8. While this does not change our view of the long term EPS power of the business, we cut our 2016 EPS estimate by less than 1% (to $7.80 per share) and our 2017 estimate by 5% (to $9.67 per share), and introduce our 2018 EPS estimate of $12.32. Given high retention rates, a superior ecosystem, a multi-product compute advantage and a growing services business, we believe free cash flow of approximately $67 billion should be sustainable long term.

For the iPhone super-cycle, Garcha said:

The iPhone 8 super-cycle. We see a number of features and upgrades, including an OLED screen, full glass display, no home button, enhanced Taptic Engine, improved camera, and wireless charging in the iPhone 8. While this is some time away, we believe the iPhone 8 will be feature and specification rich.

These features, coming potentially in September 2017 and even if in just a Pro version of the device, should drive an accelerated replacement cycle and draw in new users and should result in mix improvements. As such, we now assume iPhone units in CY18 of 250 million, up 16.1% year over year, ASPs of $667 and conservatively model gross margin at 39.0%.

S&P reiterated its Strong Buy rating on Apple, along with a $130 price target for the coming 12 months. S&P said:

As expected, Apple offers updates to all 4 of its major platforms. WatchOS (i.e. new scribble feature) and tvOS (Siri enhanced search capabilities, single sign-on, and new TV remote app) saw incremental updates. The macOS provided a bigger update, with the addition of Siri, picture-in-picture, optimized storage, auto unlock, and copy/paste between devices.

Key iOS updates include Siri/Maps/Messages integration with third-party apps, major enhancements to Messages, Music/News revamp, enhancements to Photos, and a new app called “Swift Playgrounds” to help people learn to code.

Wells Fargo has an Outperform rating. Maynard Um has a valuation range more or less in line with the consensus at $120 to $130. That is based on only 10 times the firm’s 2017 free cash flow target. Um sees more deeply integrated and open ecosystem as having been the key narratives. He said:

While many have talked about Apple’s captive ecosystem, this year’s WWDC highlights the deeper integration across its hardware portfolio. For example, the ability of the Watch to unlock a Mac or the ability to cut content from an iPad and paste it into a Mac. We believe this cross device functionality/utility could help drive further hardware sales across its portfolio (halo effect).

Additionally, Apple finally opened up parts of what have traditionally been a fairly closed ecosystem – opening up Siri, Messages, Maps, etc – which we think should drive greater utility, innovation, and convenience once more developers get on board. While the lack of new hardware could be viewed as a disappointment, new hardware across the portfolio could be coming with the new iOS, WatchOS, MacOS, and tvOS updates in the fall, setting up for the holiday season.

Wells Fargo’s investment thesis noted:

We believe the risk/reward at 8-times our free cash flow is tilted favorably with investor sentiment likely reflecting potential first-half softness and our view that iPhone shipments have not peaked and would increase year over year in December 2016.

Some other analyst calls were made going into the WWDC conference.

Piper Jaffray had an Overweight rating and a $153 price target. The firm’s Gene Munster:

Overall, we view WWDC as a warm up to more meaningful announcements in the fall including iPhone 7 and an updated Apple Watch. AAPL remains our top large cap pick with a $153 price target and continue to believe investors will look favorably at easier comps starting late this year.

JPMorgan’s Rod Hall and team have an Overweight rating and $125 price target. That target is down from $141 in January and from a peak of $145 in most of 2015.

RBC Capital Markets had an Outperform rating and a $120 price target. The firm’s Amit Daryanani and Mitch Steves saw multiple AppStore changes aligning well with Apple’s overall strategy to grow service revenue/installed base related revenue. The RBC team said:

We think Apple is poised for a near-term rally but within the range of $90.00 to $120.00. While we realize that elongating iPhone cycles would keep a lid on revenue/EPS growth for Apple until we get an innovative iPhone iteration in Fiscal Year 2017, we think iPhone 7 will at minimum drive stable and mid-single digit unit growth. Simplistically, we think it is prudent to look at iPhone growth over 2-year cycles versus extrapolating one year trends too far up (iPhone 6) or down (iPhone 5c and 6s?).

Apple has a 52-week trading range of $89.47 to $132.97. The market cap is $538 billion.