Cowen Says to Buy Apple (AAPL) Ahead of Potential iPhone Upgrade 'Super Cycle'; Affirms at 'Outperform'

June 28, 2016 7:43 AM EDT
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Price: $151.82 -1.83%

Rating Summary:
    45 Buy, 18 Hold, 5 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 12 | Down: 28 | New: 29
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Cowen and Company says to buy Apple (Nasdaq: AAPL) given the potential for a massive upgrade "super-cycle" with the upcoming iPhone 7. The firm has Apple at Outperform with a price target of $125.

Analyst Tim Arcuri commented today, While iPhone 7 still looks about flat w/iPhone 6S and macro risk is clear, our new installed base analysis suggests a "powder keg" is forming. Against a backdrop of a new OLED-enabled form-factor in '17, this argues that either 1) iPhone 7 is better than expected, or more likely 2) a "super-cycle" is setting up for iPhone in '17. Given risk/reward of 4:1, it pays to get involved and wait it out.

On the upcoming iPhone, Arcuri elaborated, We model ~75MM unit sell-in for 7/7+ through CYE16, very comparable to 6/6S last year - a view that mirrors our supply chain work suggesting new phone volumes that are about flat Y/Y. This set-up, against a backdrop of some potential Brexit-related macro demand risk (~30-50bps headwind to FQ4 (Sept) revenue based on FX moves alone) drives us to conclude that Street numbers are, if anything, still a smidge - but not a lot - too high w/C2016 EPS and F2017 EPS tracking ~1-3% below Street. On an active pre-launch iPhone installed base of ~580MM (+13% Y/Y), this already implies ~500bps lower upgrade rate for iPhone 7, reflecting some ongoing lengthening of upgrade cycles. While we still don't see positive estimate revisions for another few Qs, a new analysis suggests we are on the cusp of huge growth in the portion of the iPhone base that is >2yrs old. Ergo, either iPhone 7 is better than investors think, or we are looking at a iPhone 6-like (or even better) super-cycle in C2017. At this price, we think it very much pays to maybe still be a little early.

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