Jefferies Starts Apple (AAPL) at Hold, $110 Price Target
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Jefferies initiates coverage on Apple (NASDAQ: AAPL) with a Hold rating and a price target of $110.00.
Analyst Sundeep Bajikar comments, "Apple’s premium product strategy driven by hardware has served it well, but 1) overall device growth has both slowed and is increasingly coming from 2x-lower price points, and 2) hardware differentiation is challenged by Moore Stress.Our ecosystem analysis suggests Apple has an opportunity to scale software/services monetization across a larger device installed base like Google, but such expansion would come at lower hardware prices."
Bajikar suggests Apple is in search of ecosystem growth. "Our proprietary ecosystem framework suggests 1) Apple is over-earning on iOS driven by 2x-higher device ASPs compared to Android, 2) Apple is monetizing software/services on its iOS device installed base at a rate equal to or better than Google’s monetization of Android, and 3) Google is monetizing a larger device ecosystem. We think Apple would benefit more from scaling up its device installed base, than from monetizing existing customers at a higher level."
The analyst sees Apple Pay supporting an ecosystem expansion. "Based on our analysis and hands-on testing, we estimate Apple Pay upside of $1-to-$15 per device (installed base) would cushion lower device ASPs as Apple pursues expansion of its installed base. Our checks, proprietary survey, and Counterpoint data suggest lower-priced Android devices continue to grow faster than iOS devices. We expect Apple to continue trying to penetrate the mid-range Smartphone market. Additionally, we think Apple Watch’s lower prices (vs. iPhone) would help grow the ecosystem."
Bajikar is telling clients to wait for a better entry point in the stock. "Our FY15 EPS est of $7.69 is 8% higher than the Street's, in part because we believe the Street model does not yet fully capture Watch, Pay, and Beats. Over the last 6 months, AAPL's P/E (NTM) expanded by 20% from its 3yr avg. of ~12x to 14.5x. We think the stock is pricing in EPS of $8+, including share gains from Samsung, and think there is downside risk near term. We prefer Samsung (005930 KS) over AAPL longer term, given Samsung's strong technology position and depressed valuation. We could become more constructive on AAPL with lower valuation or evidence of a business model shift toward software/services."
Shares of Apple closed at $100.11 yesterday.
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