Morgan Stanley is out positive on Apple (NASDAQ:AAPL) saying the combination of attractive valuation (15.3x CY10 EPS), recent negative sentiment post the iPad announcement, and upcoming product catalysts set up for AAPL shares to outperform nearterm. Specifically, the firm thinks the March iPad launch and rising anticipation of the next generation iPhones will positively shift investor sentiment in coming months. Longer term, they continue to believe the earnings power of the iPhone ecosystem is underappreciated. Firm reiterates their Overweight rating and $250 price target.
Catalyst 1: iPad launch in March: Morgan Stanley expects Apple to ship its first iPad and announce additional content deals in late March to better than expected demand. They see the iPad targeting the sub-$800 consumer notebook market which equates to 30M annual units just in the US (120M globally). Firm expects iPad points of distribution to expand through CY10, both in the US and International markets, which could add 500K-1M units from channel fill alone. MSCO forecasts 6M iPad shipments in CY10,above the consensus view of 3-4M.
Catalyst 2: New iPhone product cycle in June: They expect Apple to launch new iPhones in June that offer both a lower total cost of ownership and new functionality, potentially including gesture-based technology. As they’ve highlighted in the past, the cost of device + service plan is currently the biggest barrier to incremental demand in both mature markets like the US and emerging markets like China.
Morgan Stanley's $325+ Bull case scenario foresees: 1) Broader global carrier distribution drives 10% global handset market share by F12. 12x F12 iPhone EPS of $32 + 10x core EPS of $5 = $435/shr valuation. 2) Lower-end device / service plan drive 15% global handset market share and $200 average subsidy – 12x F12 iPhone EPS of $25 +10x core EPS of $5 = $358/shr valuation. 3) iPhone sells unsubsidized, broadening Apple’s TAM and placing it in market share leadership position (33% unit share). 12x F12 iPhone EPS of $23 + 10x core EPS of $5 = $325/shr valuation
Where they could be wrong/early: The combination of seasonally weak C1Q demand and inventory draw down ahead of the new iPhone product launch have raised concerns about near-term iPhone shipments. It’s important to note that Int’l markets are a growing mix of iPhone sales (56% to 65% in LTM). With additional carrier launches in the UK and momentum/market share gains across Western Europe and Asia, they believe US iPhone units could drop below 2M (down 35%+ QoQ) without falling below the current 6.5-7M unit expectation.
Notablecalls: AAPL had a strong afternoon move yesterday, partly helped by speculation out of co's investor day they would announce a stock split. The stock kept moving up even after Apple spokesman refuted the speculation, which tells me there was natural buying going on. People just needed a reason to buy the stock ahead of the many n-t catalysts.
Reverend Jim Bob Cramer, as much as I hate to quote him made a good point regarding Apple couple of days ago:
'... So why is the stock going down? Why hasn't it rallied more? That's not the way Apple trades. It pretty much waits for an event, runs up huge before it -- hint hint, what it will do with the iPad -- and then gives up some of the gain and consolidates. That's what it is doing now. I don't think it even matters how much good ink Apple gets for anything, including the iPad, for what will be great social media applications. The stock is going to be buffeted by the market on bad days and just hold its own on good days until we are close enough to the iPad run-up stage. ...'
Link (sub. required).
That's exactly what Morgan Stanley is trying to game here - the upside move ahead of iPad launch. I have no idea whether they are right going in this early but do note the firm has issued a Positive Research Tactical Idea (RTI), which should create some additional buy interest in the name today.
Could be good for 2-4 pts of upside, could be nothing. No real conviction here.
Catalyst 1: iPad launch in March: Morgan Stanley expects Apple to ship its first iPad and announce additional content deals in late March to better than expected demand. They see the iPad targeting the sub-$800 consumer notebook market which equates to 30M annual units just in the US (120M globally). Firm expects iPad points of distribution to expand through CY10, both in the US and International markets, which could add 500K-1M units from channel fill alone. MSCO forecasts 6M iPad shipments in CY10,above the consensus view of 3-4M.
Catalyst 2: New iPhone product cycle in June: They expect Apple to launch new iPhones in June that offer both a lower total cost of ownership and new functionality, potentially including gesture-based technology. As they’ve highlighted in the past, the cost of device + service plan is currently the biggest barrier to incremental demand in both mature markets like the US and emerging markets like China.
Morgan Stanley's $325+ Bull case scenario foresees: 1) Broader global carrier distribution drives 10% global handset market share by F12. 12x F12 iPhone EPS of $32 + 10x core EPS of $5 = $435/shr valuation. 2) Lower-end device / service plan drive 15% global handset market share and $200 average subsidy – 12x F12 iPhone EPS of $25 +10x core EPS of $5 = $358/shr valuation. 3) iPhone sells unsubsidized, broadening Apple’s TAM and placing it in market share leadership position (33% unit share). 12x F12 iPhone EPS of $23 + 10x core EPS of $5 = $325/shr valuationWhere they could be wrong/early: The combination of seasonally weak C1Q demand and inventory draw down ahead of the new iPhone product launch have raised concerns about near-term iPhone shipments. It’s important to note that Int’l markets are a growing mix of iPhone sales (56% to 65% in LTM). With additional carrier launches in the UK and momentum/market share gains across Western Europe and Asia, they believe US iPhone units could drop below 2M (down 35%+ QoQ) without falling below the current 6.5-7M unit expectation.
Notablecalls: AAPL had a strong afternoon move yesterday, partly helped by speculation out of co's investor day they would announce a stock split. The stock kept moving up even after Apple spokesman refuted the speculation, which tells me there was natural buying going on. People just needed a reason to buy the stock ahead of the many n-t catalysts.
Reverend Jim Bob Cramer, as much as I hate to quote him made a good point regarding Apple couple of days ago:
'... So why is the stock going down? Why hasn't it rallied more? That's not the way Apple trades. It pretty much waits for an event, runs up huge before it -- hint hint, what it will do with the iPad -- and then gives up some of the gain and consolidates. That's what it is doing now. I don't think it even matters how much good ink Apple gets for anything, including the iPad, for what will be great social media applications. The stock is going to be buffeted by the market on bad days and just hold its own on good days until we are close enough to the iPad run-up stage. ...'
Link (sub. required).
That's exactly what Morgan Stanley is trying to game here - the upside move ahead of iPad launch. I have no idea whether they are right going in this early but do note the firm has issued a Positive Research Tactical Idea (RTI), which should create some additional buy interest in the name today.
Could be good for 2-4 pts of upside, could be nothing. No real conviction here.
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