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Apple (AAPL): Bull of the Day

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Apple (AAPL - Free Report) delivered impressive results on July 30 and the investor reaction said it all as shares vaulted above $400 for the first time and just kept going, exceeding many analyst revised price targets within hours on the final day of the month.

I'll give detailed commentary on those analyst views -- including the ones who always had it right, versus those who are just admitting they missed the persistence of this consumer-tech-ecosystem juggernaut.

First, let me share notes from my colleague Ben Rains last week...

Pandemic Highlights Apple’s Growing Portfolio

Apple’s quarterly results easily topped estimates, with sales up 11% and adjusted earnings up 18%. And iPhone revenue popped 2% to crush projections, despite the broader economic downturn and lockdowns that forced it to close many stores.

On top of that, Mac and iPad sales jumped 21% and 31%, respectively. The firm attributed some of this growth to the need for people to work remotely and connect during these uncertain times.

AAPL’s wearables unit, which includes its smartwatch and popular wireless headphones, jumped over 17%, while services climbed 15%. This growth helps showcase how vital expansion beyond the iPhone is for the company. Apple now has revenue streams coming from its massive App store, as well as its various subscription services such as Spotify SPOT competitor Apple Music, its streaming TV service, news offering, video gaming, and more.

In fact, Apple’s paid subscriptions grew by more than 35 million sequentially to reach over 550 million across its various services, up 130 million from the year-ago period. And executives said on its earnings call that they remain confident Apple will hit its increased target of 600 million paid subscriptions before the end of the 2020 calendar year. Apple also grew its revenue across all of its geographic segments.

The ability for a high-end consumer tech firm to lift its sales by 11% to a whopping $60 billion in the heart of a global pandemic and economic crisis might be all some investors need to know.

(end of Ben Rains August 7 article)

Ben summed it up beautifully right there. But many investors want to dive into the numbers of trending segments and hear what the analysts are projecting for future sales and profit growth.

Because while many newbie investors are excited about the 4:1 stock split, the real story is how the Apple ecosystem continued to diversity beyond the iPhone and clobbered sales estimate projections in almost every category...

Apple Q3 Wearables, Home, Accessories sales $6.45B vs. $5.53B last year

Apple Q3 iPad revenue $6.58B vs. $5.02B

Apple Q3 Mac revenue $7.08B vs. $5.82B last year

Apple Q3 iPhone revenue $26.42B vs. $25.99B last year

Apple Q3 Services sales $13.16B vs. $11.46B last year

Apple CEO Tim Cook said on the earnings release, "Apple's record June quarter was driven by double-digit growth in both Products and Services and growth in each of our geographic segments. In uncertain times, this performance is a testament to the important role our products play in our customers' lives and to Apple's relentless innovation. This is a challenging moment for our communities, and, from Apple's new $100 million Racial Equity and Justice Initiative to a new commitment to be carbon neutral by 2030, we're living the principle that what we make and do should create opportunity and leave the world better than we found it."
 
CFO Luca Maestr described the challenges thus, "Our June quarter performance was strong evidence of Apple's ability to innovate and execute during challenging times. The record business results drove our active installed base of devices to an all-time high in all of our geographic segments and all major product categories. We grew EPS by 18 percent and generated operating cash flow of $16.3 billion during the quarter, a June quarter record for both metrics."
 
Analyst Reaction After the Quarter

Before I share analyst views and price targets, I want to emphasize a couple of items about what you are about to witness...

1. Investment banks analysts use quantitative models (in Excel spreadsheets) to calculate both business growth and their DCF (discounted cash flow) price targets based on their estimates for segment/unit sales, costs and subsequent profits.

2. Investment bank analysts have many hard-to-see conflicts within their firm and within themselves. This matters for smaller companies. But for monoliths like AAPL, they have learned in the past 5 years to be basically afraid to stick their necks out in case we get a quarter of big declining sales in iPhones.

3. The i-bank analysts who already had $400 price targets and bumped them further are just playing the game better than the others. They see the ecosystem of apps and services evolving and don't get too scared by any single quarter of declining iPhone sales because they know they are riding a long-term wave of excellence in consumer marketing and demand as the installed base of Apple devices drives new revenues in services and other subscriptions.

4. Do not chase i-bank analyst price targets here. Know what Apple is as a device-based ecosystem and understand why large investors have been piling into the stock even more so since COVID-19: They needed a safe, no-fail investment. A "bluest" of the blue-chop bonds, per se. And AAPL is it. It may remain thus.

5. All this said, the Apple ecosystem is a dominant consumer force and will continue to remain so despite any hiccups in iPhone sales, probably for years to come.

Cookers' Bottom Line: If you are already an Apple products user and/or an investor, you are probably way ahead of i-bank analyst projections for the long-term. Stay long and strong!

But let's listen in anyway on the details of the analyst views since their job is to parse and slice all the sales projections...

Piper Sandler analyst Harsh Kumar raised the firm's price target on Apple to $450 from $310.

Whoa! That's some catching up to do from Harsh! He explains that similar to last quarter, Apple did not provide September quarter guidance given the coronavirus uncertainty and variability in operations, but he can't help but conclude that the business is "holding up extremely well, with the pandemic having little impact on the core business."

Deutsche Bank analyst Jeriel Ong raised their price target to $440 from $400 as he says the positives in the June quarter outweigh the negatives and that he suspects Apple's confidence that trends can continue into the September quarter "could understate the reality that they could in fact strengthen."

Nice work, JO! You nailed the $400 target and now allow for further upside surprises.
 
Citigroup analyst Jim Suva raised the firm's price target on Apple to $450 from $400 noting that Apple results were "amazingly strong especially considering the pandemic." While management did not provide guidance due to COVID-19, it is clear Apple's products and services are in "strong demand and the company is operating very well despite COVID-19," says the analyst.

Raymond James analyst Chris Caso raised his price target to $440 from $400 and said Apple somewhat surprisingly admitted to new iPhone availability "a few weeks later" vs. last year, which Caso expects will serve to push iPhone revenue from the September quarter to December. Even this news couldn't dissuade investors from pushing the stock to new highs.

Jefferies analyst Kyle McNealy raised his price target on Apple to $465 from $405 and said "let's not overthink this," arguing that the age of Apple's installed base of devices gives it a solid set-up into the upcoming 5G cycle. He has raised his FY20 revenue and EPS projections to $275.7 billion and $13.10, respectively, while bumping up his FY21 forecasts to $327.6B and $16.65.

Credit Suisse analyst Matthew Cabral raised their price target to $380 from $340, keeping a Neutral rating on the shares following the company's "impressive" quarterly results. Cabral says iPhone was a standout to the upside, coming in nearly 20% ahead of the Street and management expectations, and noted an improved trajectory in May and June across all products following a difficult April.

Of note, Cabral says he underestimated the resiliency of Apple and the relative importance of their wallet share for consumers amid a more challenging macro backdrop.

Barclays analyst Tim Long raised his price target on Apple to $400 from $326, keeping an Equal Weight rating on the shares. While noting that Apple beat thanks to upside in iPhone, iPads and Macs, while Services and Wearables, the Barclays analyst said "the hype segments, were basically in line and decelerating."

The analyst also noted that although 5G was pushed out, the tone for iPhone "sounded optimistic" and while the iPad and Mac outlook "remains rosy" due to work-from-home demand, "we could see risk in future quarters." Long believes Apple's current multiple "fully reflects the upside in services and a 5G iPhone."

RBC Capital analyst Robert Muller raised his price target to $445 from $390, citing iPhone demand that continued to top expectations and help drive an all-time high install base. Muller says the stock offers a favorable set-up heading into Q4 before a "significant" iPhone generation upgrade cycle, citing his increased confidence in Apple's ability to drive recurring cash flows from its loyal customer base.

JPMorgan analyst Samik Chatterjee raised their price target to $460 from $425, notiing that the quarter "surprised even bullish expectations, hardly missing a beat," even as several disruptions impacted its ability to operate retail stores successfully during the quarter. He raised his estimates "materially," most notably for iPhone sales.

Canaccord analyst T. Michael Walkley raised their price target to $460 from $444, noting that Apple clearly is demonstrating during the pandemic the strength of its products and ecosystem with a return to year-over-year growth for iPhones and double-digit growth for Macs and iPads. Walkley believes the stock is compelling for long-term investors with the 5G upgrade cycle a potential benefit during 2021, especially as other hardware categories are growing double digits and a continued business mix shift towards high-margin services expands sales and profit growth opportunities.

BofA analyst Wamsi Mohan downgraded Apple to Neutral from Buy with a price target of $470, up from $420. Mohan observes that shares have experienced a rapid multiple expansion since June, while 2021 estimates have largely been unchanged in that time. With the stock trading at the highest premium to the S&P 500 in 10 years, he is concerned about risks to product gross margin pressure for the 5G iPhones, unit volume risk in case of higher average selling prices, tough comparisons in 2021 and pressure on services margins from content amortization costs.

Bernstein analyst Toni Sacconaghi provided another update since earnings: He says fiscal year 2021 could be a big year for Apple's iPhones for two reasons: (1) materially weaker demand in each of the last two years, which has led to dramatically lower upgrade rates and pent up demand; and (2) a pushed out introduction of the new 5G iPhone from the end of fiscal 2020 to the beginning of fiscal 2021. Sacconaghi forecasts iPhone unit shipments to be about 230M in fiscal year 2021, up an estimated 20% from this year, resulting in 2021 revenues and EPS that are well above consensus.

Sacconaghi notes that upgrade rates remain well below fiscal years 2017 and 2018 levels, reflecting some "structural elongation of replacement cycles."

Wells Fargo analyst Aaron Rakers raised the firm's price target on Apple to $485 -- a Street high among major i-banks -- after recently completing a worldwide iPhone subscriber base survey.
 
Rakers's survey found that 84% of iPhone owners are interested in upgrading their smartphones this cycle, despite the impact of coronavirus. His scenario analysis upgrade model based on the survey's results leaves him to consider about 250 million plus iPhones being sold, well above his current 217M unit projections for 2021.
 
While Rakers appreciates that his survey is a very small end-user snapshot relative to an active installed base approaching a billion users, he thinks the results point to upside for the upcoming iPhone 12 cycle.
 
That's the end of my parade of analyst views on AAPL.

Bottom line: Understand the vast ecosystem that Apple has created and will keep building with devices, software, and services and then buy the dips and hold for the long run.
 
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