Apple (AAPL) PT Raised to $368 at Morgan Stanley on iPhone Replacement Cycle Peaking and 5G Upgrade Cycle

(Updated - January 17, 2020 8:58 AM EST)

Morgan Stanley analyst Katy Huberty raised her price target on Apple (NASDAQ: AAPL) to $368.00 (from $296.00) while maintaining a Overweight rating saying smartphone replacement cycles are peaking and the upcoming 5G upgrade cycle will be a driver of sales.

"iPhone replacement cycle has stretched to nearly 4 years after the market shifted from subsidies to installment plans and the rate of technological change slowed. However, longer battery life and upcoming 5G technology which will enable new functionality like Augmented Reality combined with aggressive trade-in offers that subsidize upgrades for existing iPhone owners suggest replacement cycles can't stretch much further and may in fact begin to shrink," Huberty commented. "At the same time, Apple has proven less earnings dependency on iPhone with the success of Services and Wearables which now make up 27% of revenue and 37% of profits."

The firm raised FY21 iPhone unit estimate to 215M implying a 3.7 year replacement cycle (down from 4 years in FY20).

On 5G the analyst said the launch of new 5G enabled smartphones in 2020 and 2021 will be a catalyst for reaccelerating smartphone shipment growth and contracting replacement cycles.

"Importantly, we don't believe that the current state of 5G wireless infrastructure, or the lack of complete 5G coverage in many regions globally, will be an inhibitor to 5G device adoption. Instead, we believe that the launch of new 5G models will serve as a market catalyst for 5G infrastructure build-out and related marketing, which in turn will spur greater consumer adoption of 5G devices and more 5G smartphone launches, creating a virtuous cycle of sorts that is currently underappreciated by the market."

The firm raised their global smartphone market growth forecast to 1.8% Y/Y growth in 2020 and 3.5% Y/Y growth in 2021, from +0.6% Y/Y and +1.8% Y/Y in 2020 and 2021, respectively. They also introduce 5G shipment forecast, which calls for 214M 5G smartphone shipments in 2020 (15% of smartphones shipped) and 427M in 2021 (29% shipments), which are 12% and 27% higher than IDC's forecast in 2020 and 2021, respectively.

The analyst expects Apple to continue to outperform hardware peers.

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