RBC Capital Discusses Bull/Bear Debate on Apple (AAPL); Lifts PT to $120

RBC Capital analyst Amit Daryanani bumped his price target on Outperform-rated Apple (NASDAQ: AAPL) to $120.00 (from $117.00) and provided investor feedback on the recent rally.

Daryanani said unlike prior AAPL rallies, we are seeing distinct apprehension among "bears" to step in, while bulls are buying the name for the multiple tailwinds AAPL has that become all the more differentiated in a volatile market.

He notes institutions are broadly underweight AAPL, which he said is a dynamic that could put a drag on performance given how material AAPL is across key benchmarks, and AAPL is now outperforming the S&P500 by ~500bps.

"We think valuation is cheap, buybacks are material and estimates are heading higher – a simple but effective recipe for the stock to keep working," he said. "We think investors could go incrementally long AAPL at current levels and through year-end given what we see is a skew of data points that will be more positive vs. negative. While iPhone units remain key, we think as the stock rallies, investors would also look/expect for gross margin upside."

Bulls Say… 1) Attractive valuation: makes this a compelling name at this point. Stock is trading at ~8x EV/FCF and 12x P/E (9x ex-cash). 2) iPhone is better than feared: The best thing that happened to iPhone 7 was investors had very low to negative expectations, and vs. that backdrop, the lead-times and demand trends have been incrementally better. 3) Gross-margins should be stable to showing some upside: This was a key part of bear thesis 3-6 months ago given the iPhone SE concerns, but this has been placed on the back burner. 4) Share gain potential: Given the challenges at Samsung, this should be a positive benefit for AAPL. 5) Services keep growing: Services maintain a ~20% CAGR.

Bears Say… 1) Nothing has changed: The fundamental challenge for AAPL remains: how do you grow a $200B+ revenue line on a consistent basis? 2) More replacement driven: Vast majority of iPhone units are for replacement/upgrades (we estimate ~70%) and a small minority are new buyers. Hence, the replacement cycle is key, not share gains anymore. 3) Gross-margins could stagnate: AAPL is effectively giving “more for same” by doubling memory across SKUs; this could impede ASP and pricing somewhat. 4) Where is innovation across the ecosystem? Bears argue that newer iPhones have incrementally less innovation, 5) Valuation: Stock has been in a trading range and is unlikely to break that unless there is a clear path for revenue upside over the next few quarters.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $111.77 yesterday.

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