Why Credit Suisse Is Bullish on Apple
Analyst Kulbinder Garcha hosted a conference call with Apple's CFO Peter Oppenheimer and came away from the call confident, noting "there are several longer term growth drivers that exist for Apple." He reiterated his "overweight" rating and $600 price target.
There has been a lot of concern among the media and on Wall Street that smartphones are becoming a mature market. Last week, Garcha cut iPhone estimates for the second quarter of 2013, now seeing the company selling 30.6 million iPhones, down from his previous estimate of 38.2 million. That was due in part to a mid-2013 iPhone refresh, but also in part to impact from Samsung and other smartphones that have larger screens.
Garcha also cut his full-year 2013 earnings estimates, to $44.92 per share from $47.90, and 2014 earnings estimates, to $54.03 from $58.18 per share.
Those concerns may be overblown, however.
Oppenheimer quoted data from IDC, noting that 45% of smartphones sold are now over $400 and, though the low-end market is growing faster than the high-end, the high-end market is still growing.
There is also the ability for Apple to add new carriers as it moves into new markets. Garcha estimates that Apple can add 65 million iPhone units through carrier expansion alone. Apple has been in talks with China Mobile (CHL) , presumably about the iPhone, though nothing has been finalized as of yet.
A deal with China Mobile would continue to play out the China expansion theme, where Apple is now generating a healthy chunk of revenue. The company only has 11 stores in China, but managed to generate $23 billion in annual revenue from the country.
Apple is also moving into Turkey, and is working on increasing its presence in Brazil, Russia and India. Garcha noted the recent efforts to finance Apple products could help spur sales. "New financing terms could make Apple's products more affordable to consumers," Garcha wrote. By addressing additional emerging markets, this could spur an additional $90 billion in revenue and $21 per share in earnings by 2015.
There's also the question of Apple's $137 billion cash hoard. Activist investor David Einhorn recently proposed the idea of Apple issuing preferred stock to unlock the value of the cash on its balance sheet. Einhorn also sued Apple regarding Proposal 2, a suit which Einhorn dropped after U.S. District Judge Richard Sullivan granted Greenlight Capital a preliminary injunction.
Apple management continues to look at all options regarding the return of excess cash to shareholders. Garcha noted that Apple could boost its dividend yield to 4% this year if it returns its $26 billion in excess domestic cash.