Cowen Firm on Apple (AAPL) Following Jabil (JBL) Quarterly Results; Boosts Q117 iPhone Estimates

September 22, 2016 8:23 AM EDT
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Price: $120.00 +0.18%

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    60 Buy, 10 Hold, 5 Sell

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Cowen and Company affirms Apple (Nasdaq: AAPL) with an Outperform rating and $125 price target today, and offers a read-through on the stock following quarterly results from Jabil.

Analyst Tim Arcuri noted that Jabil guided FQ1 (Nov) revs in-line w/ Street (with DMS revs +33% Q/Q and -12% Y/Y). JBL’s AugQ and NovQ implied AAPL results (see Figure 1; up ~40% Q/Q in AugQ and up ~30% Q/Q in NovQ) make sense to us and are broadly supportive of our iPhone unit expectations for CQ3 and CQ4 (+13% Q/Q and +60% Q/Q, respectively).

Arcuri also continued, Additionally, while we do not cover JBL, our separate field checks have suggested AAPL has finally begun to cautiously increase assembly plans for iPhone. Specifically, our work suggests FQ1:17 (Dec) has gone up ~5% to ~73MM units vs. our prior check last week indicating ~69.5MM. The change is primarily driven by strong demand for iPhone 7+ (up almost 40%) and ~2MM more iPhone 7 (up ~7%) that more than offset a cut in iPhone 6S (down ~30%) and iPhone 6S+ (down ~12%) units. Ergo, our checks indicate that iPhone mix is now skewed more toward the new builds (7+) that could provide upside to Street ASP assumptions (Cowen $600 FQ4:16, $628 FQ1:17). Additionally, the iPhone mix change from our checks is consistent with our 9/14/2016 note (Lead Time Tracker: Strong Demand for 7+, 32GB SKU, and Jet Black) and validates our view that AAPL wants to maintain some supply constraints until demand becomes a little more certain, in an attempt to avoid a supply glut and associated cuts in the supply chain like the iPhone 6S it witnessed last November.

We are raising iPhone estimates to ~73MM unit sell-in and revs/EPS to ~$72B/$3.07 for FQ1:17 (Dec). Our estimates are still a little below Street revenue (Street revs/EPS $74B/$3.13), but this goes a long way to "bridging the gap" and we think Dec Q guidance is the last time investors will, for all intents and purposes, care about iPhone 7. Ultimately, our view is unchanged: we remain very bullish on AAPL as our installed base work suggests a powder keg is forming where the entire growth of the base a year from today - and then some - will be from older units (>2 years old) that are ripe for upgrades, especially to a new OLED-enabled form factor. We see this aiding growth of the iPhone 7 that ultimately is a “bridge” to an iPhone 10/iPhone X “super cycle” in C2017 as we have said in our big 6/27/16 installed base note.

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