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Credit Suisse Says Buy The Weakness In Apple

Apple Inc. NASDAQ:AAPL - Credit Suisse Says Buy The Weakness In Apple

Shares of Apple Inc. AAPL 2.31% have dropped more than 3 percent after a Nikkei report showed that the iPhone maker's second half build plans are likely to shrink to 70–80 percent of the level reached in the same period last year.

But, Kulbinder Garcha of Credit Suisse urged investors to buy the weakness in the shares as the news was already expected. The analyst reiterated his Outperform rating and $150 price target on the stock.

"Acknowledging near term weakness, we believe this reset provides an opportunity and we see a trough valuation on a P/E ex cash basis of 8.5x, suggesting support at $95," Garcha wrote.

Although builds being down 20–30 percent versus last year is disappointing, the analyst said, "This should have already been understood."

For the second half of 2016, the analyst expects about 109 million units, or down almost 20 percent from the 133 million units in the second half of 2015.

"So, while the news is clearly disappointing, it was already largely included in our iPhone unit estimates," Garcha noted.

Looking Further Ahead

The analyst said the iPhone business should recover in 2017. Though Garcha sees 12.9 percent drop in 2016 iPhone units to 202 million, he sees a recovery in the iPhone business to 227 million units in 2017, given installed base growth, high retention rates and normalization in replacement rates.

"Specifically, we believe installed base growth, which has grown 80 percent since 2013, should drive unit growth beginning with the iPhone 7," Garcha elaborated.

"Long term, given Apple's Services growth and an installed base that could grow to ~1.4 billion long term, we see a sustainable, annuity like FCF of $67 billion LT, implying a valuation of $150," Garcha added.

According to TipRanks, Garcha has a success rate of 51 percent with an average return per recommendation of +6.1 percent. The analyst is ranked 423 out of 3,913 analysts.

At time of writing, shares of Apple were currently down 2.17 percent to $90.50.

May 2016UBSMaintainsBuy
Apr 2016Brean CapitalMaintainsBuy
Apr 2016BarclaysMaintainsOverweight

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