Needham & Company Starts Apple (AAPL) at Strong Buy, $150 PT

Needham & Company initiates coverage on Apple (NASDAQ: AAPL) with a Strong Buy rating and a price target of $150.00.

Analyst Laura Martin commented, "Consumers are creating a new global distribution network over connected mobile devices, primarily smartphones. We recommend investors have exposure to this massive trend. AAPL is an arms dealer that dominates the wealthiest segment of this rapidly growing consumer market. Our survey research concludes that iOS platform churn is only about 12% annually, suggesting fewer competitive pressures, higher pricing power, more predictable revenue streams, and a halo effect that drives sister-device sales and higher ancillary revenue than AAPL's current share price implies. We calculate AAPL's value based on four differentiated methodologies and conclude that AAPL’s long-term value is $180/share, 62% above current levels. We initiate coverage with a Strong Buy rating and a 12-month target price of $150, up 35%.

Valuation thoughts include:

• What’s in a name? For each of the past 5 years, AAPL’s profit margins have been higher than Disney’s and its asset productivity (i.e., earnings per asset employed) have been higher than Facebook’s. Shakespeare would insist that AAPL should not be valued like a hardware company if its fundamentals are better than world-class content and Internet companies. This valuation methodology suggests that AAPL should trade at $200/share, up 80%.
• Predictable. The value of a customer should be tied to ecosystem churn, which is about 12% annually for AAPL, similar to cable companies’ recurring subscription business models. AAPL bundles content, software, and services (like Siri) into its hardware, which mirrors cable company bundles of voice, video and data. If AAPL was valued at an average cable company multiple today (even though AAPL has a far less capital-intensive business model), AAPL would trade at $180/share, up 62%.
• Pixar vs Harry Potter. AAPL’s valuation swoons when its next product isn’t expected to be as big a hit as its last product. Using a case study of Pixar vs Harry Potter, we suggest that APPL is far more valuable than a hit-driven business because there is less variability in unit demand (i.e., lower risk) while AAPL retains all the upside potential of a hit product. This methodology suggests that AAPL is worth $170/share, up 53%.
• Ecosystem Loyalty. Our proprietary survey of 300 iPhone owners found that churn was about 12% annually, implying an eight year average stay in the iOS ecosystem. We also found that, on average, they owned 1.3 iOS devices, implying that AAPL’s 1B active devices are owned by 770mm unique users globally
• Safety first. AAPL’s FY16 P/E of 12.2x is about half the current S&P 500 average of 23.5x, and AAPL’s net cash balance of about $152B maximizes flexibility amid global chaos. Downside protection is enhanced because AAPL is repurchasing shares, which shrinks claims on future earnings and implies a floor under its share price.

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 $111.12 yesterday.

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