Apple (AAPL): The Worst is Behind Us - Needham & Company
Needham & Company analyst Laura Martin reiterated a Strong Buy rating and $150 price target on Apple (NASDAQ: AAPL) following Q3 results, proclaiming 'the worst is behind us'.
Martin commented, "AAPL reported FY3Q16 revenue of $42.358B (down 15% y/y), and EPS of $1.42 (down 23% y/y). Both were in line with our estimates. AAPL’s fundamentals momentum should improve in FY4Q16 owing to the introduction of the iPhone 7, plus $400mm (our estimate) of Pokemon Go revenue at 100% margins, which we believe will allow faster EPS growth than guidance. AAPL’s FY1Q17 should benefit from the Christmas sales cycle. In January 2016, AAPL stated that there were 1B active iOS devices in use. We calculate that this is growing by about 50mm annually. Cheaper smartphone models (like the iPhone SE) are attracting record levels of “switchers” from the Android ecosystem. Since our work calculates that iOS churn averages 15% annually (an 8-year iOS stay), this implies improving iOS ecosystem economics."
What they liked most about AAPL’s FY3Q16 included:
- Services revenue grew 19%y/y to $6B total in FY3Q16, similar to FY2Q16 growth of 20% y/y in FY2Q16, which was up from 15% in FY1Q16. AppStore revenue grew by 37% y/y, and transacting customers hit an all-time high.
- iPhone units sold hit 40.4mm + channel inventory fell by 500K, implying sell through fell by only 8%, to the low end of AAPL’s target inventory levels. ASP fell to $595 in FY3Q16 thanks to iPhone SE launch, and should improve from here.
- iPad shipped 9.95mm units, its best quarter in 10 quarters, reporting revenue up 7% y/y, thanks to the high-priced iPad Pro. ½ of iPad pro buyers are for work, and many are purchased as replacements for PC notebooks.
- Apple Pay (included in services revenue) is tracking up 450% y/y usage, and 3mm locations now accept it. Globally, Apple Pay is in 9 markets and ½ of total transaction volume came from outside the US in Fy3Q16.
- Return of Capital. AAPL returned $13 billion to investors through share repurchases and dividends in FY3Q16, and declared a $0.57/share dividend.
- AAPL’sValuation remains compelling (our view) at 10.6x forward year (FY17E) P/E. This is well below the mean S&P500 P/E ratio of 15x.
What they didn’t love about the FY3Q16 call:
- China revenue fell 33% y/y in FY3Q16, worse than last quarter, after being up 110% y/y last year in FY3Q15.
- Lowering Estimates to better align with updated management guidance. As a result, we now expect 4Q16 revenue of $46.06B (down 11% y/y and 2% below our previous estimate), and EPS of $1.63 (down 17% y/y and 4% below our previous estimate
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Shares of Apple closed at $96.67 yesterday.