Wall Street is Already Looking Past Apple's (AAPL) iPhone 7 to the 8

August 31, 2016 1:52 PM EDT
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Apple (NASDAQ: AAPL) is just a few short days from revealing its iPhone 7 (09/07) but Wall Street analysts are already looking past the device to the next iteration.

In a note to clients today, Credit Suisse analyst Kulbinder Garcha said, "[i]t seems largely understood that the iPhone 7 product cycle will likely be muted (driving limited growth and innovation) and will be followed by an iPhone 8 Super Cycle in 2018."

He said what investors are wrestling with is exactly how large the iPhone 8 Super Cycle will be.

The firm said their installed base analysis shows iPhone units troughing in 2016 at 207 million before rising to ~250 million in 2018 driven primarily by a quickening replacement rate of 30 months in 2018 from 32 months in 2017.

Commenting on concerns that the innovation expected to drive this super cycle may not be significant enough, as many Android devices already sport the expected features, he said "Apple has historically trailed Android in terms of specs, but the strong ecosystem and retention rates have always driven a strong upgrade cycle (e.g. the larger screen on the iPhone 6)."

Despite a weaker near-term product cycle, the firm still sees solid risk-reward arguments. They see a trough valuation of P/E ex-cash of ~8.5x and add back ~$13/share of fully taxed net cash, suggesting support at $97.

Given services growth and an installed base that could reach ~1.4 billion long term, they see sustainable FCF of $67 bilion with a valuation of $150.

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Credit Suisse, Kulbinder Garcha

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