I have summarized a dozen sell-side analysts notes regarding Apple’s iPhone 6, Apple Watch and Apple Pay announcements. From my review of the announcements I give Apple an A- grade and keep in mind as you read the summaries below that analysts tend to skew their writings and thoughts to their rating. In a lot of ways that makes sense but it can create an anchor until a big enough event, usually an earnings announcement, comes along.
One thought on the Apple Watch and its early 2015 availability. While you won’t be able to give it as a gift or receive it on Christmas day, I think it makes sense for Apple to sell a cool looking gift certificate during the holidays. Yes one challenge is that there are multiple price points and we only know the $349 entry model but overall it makes sense to me.
Tim Arcuri at Cowen (Outperform with $106 target)
Arcuri believes overall Apple’s announcements met his expectations with the Apple Watch a bit later availability but higher priced. He would be a buyer on weakness given the stock’s relatively inexpensive valuation, wearables and new services could become meaningful in the long term and iPhone 6 sales should drive record results in the medium term.
Arcuri estimates that Apple could sell 20 million Watch’s in fiscal 2015 and that its Taptics functionality could migrate to other Apple devices. He views Apple Pay as a way to differentiate Apple’s devices vs. Android and generate higher device sales.
Keith Bachman at BMO (Outperform with $106 target)
Bachman didn’t change his estimates but believes the new iPhones will do well and drive a multi-quarter upgrade cycle. It could cannibalize the iPad Mini but that would be positive for margins.
He was impressed by the Watch’s design, user interface, and features, though pricing was modestly higher than he initially thought. While missing the holiday season is unfortunate, the Watch's availability keeps investors in the shares by creating a pending product launch. Bachman believes his 30 million unit projection in the first year is likely high but he hasn’t lowered it yet.
Apple Pay is a feature that should help sell Apple products and provide some small help to the bottom line. Apple is initially focused on payments, but thinks the company will do more with the mobile wallet longer term.
Kulbinder Garcha at Credit Suisse (Neutral with $96 target)
Garcha believes Apple’s new products and services were solid and met expectations (except for an updated iPad which I believe very few were expecting) but that the best case of $8 in calendar 2015 EPS is largely priced into the shares. He lowered his calendar 2014 EPS slightly from $6.39 to $6.35 but significantly raised his calendar 2015 EPS from $7.12 to $7.92. His $96 price target is based on 11x his fiscal 2015 EPS of $7.77 and adding in $11 for net cash.
Garcha wrote ‘from a fundamental perspective, we acknowledge that the new offerings are welcome additions to the portfolio that will strengthen not only the competitiveness of each product category but also the wider ecosystem and the increasing developer effort behind Apple Pay, HealthKit and WatchKit highlight this. In turn, we believe this drives resilience in its hardware sales through industry leading retention rates.’
His two main reasons for not having an Outperform rating are due to gross margins essentially remaining flat and EPS growth being suspect due to the product cycle driven nature of Apple’s business and mature high-end smartphone market.
Rod Hall at JP Morgan (Overweight with $112 target)
Hall’s note was shorter than most but he thought the iPhone’s availability was better than expected and the A8 processor is truly a desktop class processor. Apple Pay will have little earnings impact but could help sales of devices.
Hall thought Apple’s Watch was very good including haptic feedback, an innovative and easy to user interface, and integrated health tracking capabilities including pulse. He also thought the videos didn’t do it justice (which is quite a statement since they looked very impressive to me when I rewatched the webcast last night).
Andy Hargreaves at Pacific Crest (Downgraded to Sector Perform with $100 target)
As previewed last week Hargreaves downgraded Apple from Outperform to Sector Perform since the announcements did not provide upside to his estimates (I'm not sure Apple could have done much more).
He was impressed with the iPhone 6s but believes their potential is largely priced into the shares at the current price and that it will be difficult to develop new iPhone users so the company will be dependent on upgrades.
Hargreaves views Apple Pay as increasing stickiness to the company’s ecosystem but not a financial driver. He points out that Tim Cook started off his presentation of by saying that others had tried and failed due to being ‘focused on creating a business model centered on self interest instead of focusing on user experience’.
Hargreaves sees the Apple Watch as attractive, but the need for phone tethering, short battery life, and lack of compelling features for people who do not want a watch will limit the market. He does estimate that Apple could sell 30 million in calendar 2015 which does increase his fiscal 2015 EPS estimate from $7.58 to $7.96 and fiscal 2016 from $7.29 to $7.88. It is interesting that a $0.38 and $0.59 EPS increase in fiscal 2015 and 2016, respectively, isn’t incremental to his target price.
Hargreaves does point out in his note a relative investor (funds and not retail investors) should be equal weight Apple in their portfolios. Since overall funds are underweight Apple that should lead to a higher price based on his recommendation.
Katie Huberty at Morgan Stanley (Overweight with $110 target)
Huberty believes that the iPhone 6 & 6 Plus are priced right with features that will drive share gains, Apple Pay is another sign of Apple’s ability to solve complex problems and partner with an existing ecosystem (like iTunes and App Store), and Apple Watch is a first step toward unlocking the wearables market opportunity.
Her US and Australia surveys indicate that Apple can increase its share by 11 to 15 points with larger screen iPhones and believes ASPs could increase due to increased functionality and larger NAND memory content. She is bullish on Apple Watch (expecting 30 to 60 million in the first year) but has some concern that there isn’t a killer app since it seems like there was a “Swiss Army Knife” approach to the demos. Apple Pay leverages and could accelerate the growth of services and lead to multiple expansion for the shares.
Stuart Jeffrey at Nomura (Neutral with $104.00 target)
Jeffrey titled his note “6 Plus 6 equals zero” to indicate that Apple’s announcements almost matched everything as expected and he did not change his estimates. He expects the iPhone 6 to outsell the 6 Plus by 2.7x with a decline in high-storage iPhone models from 39% to 25% of sales. Jeffrey is forecasting iPads to have no growth due to cannibalization from the larger screen iPhones and the iPhone gross margins could fall up to 250 basis points in fiscal 2015. Jeffrey expects robust iPhone sales in the December quarter but that ecosystem stickiness could dampen the number of Android users who will migrate to iPhones.
Jeffrey views the Apple Watch as clearly very capable from current smartwatches but mostly replicates the iPhone with no killer feature which will restrict adoption. I agree with him that it won’t drive a meaningful amount of revenue for Apple in the near term but his description of a mechanical watches crown being difficult to turn I don’t think will apply in this case (he didn’t get to test drive the Watch and neither have I).
He views Apple Pay as a mature and strong mobile payment solution with lower barriers of adoption since the company isn’t storing any user or merchant data. Jeffrey views the solution more as a way to drive device sales vs. services revenue.
Steve Milunovich at UBS (Buy with $115 target)
Milunovich has revised his estimates to incorporate a new iPhone storage mix, a push-out of the Apple Watch to early next year, better-than-expected Apple Watch pricing, and a more cautious view on longer-term iPad unit growth. He has raised his fiscal 2015 and 2016 revenue estimates by about 2% while his fiscal 2015 EPS estimate jumps from $7.50 to $7.80 and fiscal 2016 goes from $8.33 to $8.75.
He expects the shares to move on the next two Mondays from either pre-order or first weekend sales being announced. Having two larger form factors could dampen initial pre-orders since some buyers may want to check out the two sizes before they make a decision.
Milunovich believes Apple Watch’s sales could trend similar to the iPad’s. He is estimating 24 million could be sold in fiscal 2015 (about 10% of eligible iPhone users) and 40 million in fiscal 2016. While there was no information on battery life Apple did say they expect people to wear them all day and recharge every evening.
He believes that Apple Pay mostly supports device sales with some potential for additional revenue. The company took the path of least resistance by leveraging the current payment structure and players.
Gene Munster at Piper Jaffray (Overweight with $120 target)
Munster described Apple’s announcements as the iPhone 6 as an appetizer, Apple Pay as the main course, and the Apple Watch as dessert which left him feeling incrementally better about the company's product offering leading into December 2014. While he is concerned that there are tough compares for the iPhone in the September quarter due to the 5c’s channel fill last year overall (but shouldn’t there be channel fill for the 6 and 6 Plus?) it sounds like his December quarter iPhone unit estimate of 52 million is exposed upwards (sell-side about 55 million and buy-side about 60 million).
While Munster believes Apple’s Watch is light years ahead of the competition (but doesn’t have a significant use case) he estimates Apple could sell closer to the 10 million of his 5-10 million estimate for the Watch since there are three different versions (Watch, Sport and Edition).
After testing Apple Pay Munster believes that the company has an inherent advantage vs. other NFC based offerings due to the consistency it can provide across its iPhones and Watches along with the number and breadth of partners it has and should continue to increase. It could help hardware sales initially as the company ramps revenue from services.
Aaron Rakers at Stifel (Buy with $110 target)
Rakers expects iPhone sales in the September and December quarters to total 96.3 million which would be a 13.6% increase year over year with China Mobile being a positive wild card. Apple Pay is a positive expansion of the company’s ecosystem and leverages its TouchID capability and new NFC feature. Apple Watch is a big unknown so his initial guess is 10 million units which add $0.10 to $0.20 per year in EPS (he is at $6.95 for fiscal 2015).
Ben Reitzes at Barclay’s (Overweight with $116 target, was $110)
Reitzes increased his price target from $110 to $116 with a small increase in his fiscal 2015 EPS from $7.10 to $7.20. One key point in his view is the ASPs on new products strike a fine balance of protecting margins while maintaining prices relatively close to levels consumers have been comfortable paying in the past.
He didn’t change his iPhone estimates but believes the combination of Apple Pay and Apple Watch along with potential share gains in China and India could create upside to his projections.
Reitzes believes Apple Pay could reshape the payments industry but has a lot of questions about how it will be monetized, rationale for not collecting retail information and is there an advertising opportunity associated with it.
He was impressed with the Apple Watch as a good job engineering an elegant yet functional solution. He tried them on and believes the high-end ones, especially the gold versions will be strong sellers.
Brian White at Cantor (Buy with $123 target)
White believes Apple outdid itself with the introduction of the iPhone 6 with a 4.7-inch screen and a 5.5-inch iPhone 6 Plus that provides Apple with entry into the fast growing “phablet” device category. After the event he had the opportunity to take both new iPhones for a test drive and felt there is simply no comparison with the iPhone 5s.
He believes Apple Pay provides another attractive service to users of Apple products, adding more stickiness to the company’s digital matrix that includes over 800 million store accounts.
Apple Watch has a beautiful display and handsome design aesthetics that provide for a clean, smart look. From his interactions with many companies showing off smartwatches White believes Apple has clearly taken this category to an entirely new level.
In some aspects White’s assumptions for the Watch are conservative ($349 ASP) and others aggressive (20% quarterly iPhone conversion rate, way to high in my mind) which leads him to projecting 37 million units in the first year with $12.8 billion in revenue and $0.60 to $0.70 in EPS.
