Cowen Comments on Apple (AAPL) Following Sept. Event; Apple Pay Should Exploit Fragmented Android OS (GOOG)
Cowen and Company maintains Apple (Nasdaq: AAPL) with an Outperform rating and target price of $106 following the company's iPhone 6/Watch/Apple Pay event on Tuesday.
Analyst Timothy Arcuri offered the following commentary on Apple's new products:
- From a high level, launch of 4.7" iPhone 6, 5.5" iPhone 6+, Apple Watch, and a big new payments initiative (Apple Pay), the company checked all boxes.
- Among all key iPhone technical improvements (20nm A8, M8 w/elevation +distance, 20 LTE bands w/CA, 802.11ac, VoLTE, and WiFi calling), the new camera image processing stands out most significantly, while the extension of iPhone to larger screen sizes sets up further high-end share gain opportunities and a more tangible upgrade incentive for the 200MM+ iPhone 5/5S/5C IB. Lastly, a new high-end 128GB SKU and, for the first time, a $100 higher entry price for iPhone 6+ provide some margin cover (albeit we still expect 6+ to initially be the supply constrained equivalent of the 5S gold version).
- Apple Watch, while, for now, not available until early '15 and somewhat limited by a necessary iPhone tether, represents both a big new vertical (>1B/yr unit TAM, of which ~25% are electronic) and contains an important technology "trojan horse". In addition to sapphire glass, new S1 processor contains a MEMS-based force touch controller that effectively creates a 3rd dimension to the display - a key development we think proliferates across product line and opens opportunities in areas like new keyboards, gaming, etc.
- Lastly, rather than fighting an uphill battle to make money in payments, Apple Pay represents AAPL at its best; leveraging an iTunes critical mass to partner with a host of major financial institutions and vendors to improve customer experience and ultimately, SELL MORE HARDWARE. More than any initiative to date, Apple Pay should truly exploit a fragmented Android ecosystem that will likely struggle with vital security requirements of a payments mechanism.
- At the end of the day, iPhone 6+ is the first time AAPL is upselling customers at the high-end, and Apple Pay further sets it apart from peers like AMZN, GOOG and even PayPal/EBAY in that the monetization mechanism is around the experience rather than the data.
Implications on Arcuri's model: While China was not listed as an initial launch country, we would expect this to be added separately in near-term. Given this, we still like our FQ4:14 (Sept) + FQ1:15 (Dec) iPhone unit number of ~95MM and see a number in high 40MM's or maybe 50MM possible for FQ2:15 (March) while we also like our ~30MM unit number for Apple Watch in C2015. Long-awaited inclusion of .ac is +ve for TER, BRCM should retain combo chip as expected, and inclusion of NFC and payments build is +ve for NXPI. Relative to overall semis, checks indicate some recent seasonal slowdown in utilization at TSMC and other foundries, but much depends on sellthrough for iPhone w/A8 supply likely in the 100MM range b/w now and year-end.
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Apple closed at $97.99 yesterday.