Apple, Inc. (NASDAQ: AAPL)
In recent news, AAPL has had its iphone 6 sales halted in China due to a patent dispute. This had initially come as a giant hit to the company but some believe the troubles may be over stated. Let’s take a closer look at the situation and the potential outcomes.
Analyst Expectations
The equity analyst team at UBS securities had the following comments on AAPL and the recent news ou of China.
Apple reportedly ordered to halt sales of iPhone 6 and 6 Plus in Beijing Reports from Forbes (link) and elsewhere indicate a lower court ruling may have ordered Apple to stop selling iPhone 6 and 6 Plus models in Beijing. The reports suggest that the Beijing Intellectual Property Office may have ruled that Apple violated a patent held by Baili, a lesser known Shenzhen mobile phone maker, relating to the exterior design of Baili’s 100C phone. A statement from Apple indicates the company appealed an administrative order in a regional patent tribunal last month and the order has been stayed pending review. The company notes that all iPhone models are available for sale today. In comparing pictures of the 100C there do appear to be reasonable differences between the two brands. Seems early for the existential threat Two months ago Forbes reported (link) that Apple’s iBooks Store and iTunes Movies were suspended due to new laws that restrict foreign companies from publishing content in China. We have written that China is an existential threat to Apple in that the government could decide to favor local suppliers (link). However, we view this as a long-term risk. In F15 before China slowed, the country represented 25% of revenue and 27% of operating profit as well as 53% of revenue growth and 45% of operating profit growth. Weak product cycle, strong ecosystem Street estimates and price targets continue to fall. We cut our iPhone estimates and earnings a few weeks ago based on our new installed base model suggesting little iPhone growth in F17 with a stronger rebound in F18 (link) and (link). Jabil’s earnings report confirmed what carriers have said there will be no improvement until the iPhone 7 and plenty of question marks even then. The irony is that as the product cycle weakens, the ecosystem arguably strengthens with enhancements to Apple’s platforms. Valuation: Stock range-bound; keeping price target of $115 Our DCF analysis (link) implies downside risk only if iPhone declines greater than 5-10% per year. We believe iPhone sales will stabilize in F17 and grow 15% in F18 on a strong upgrade cycle justifying a higher multiple. Our price target of $115 is based on 13x our F17E EPS.
About Apple, Inc.
Apple Inc. (Apple), incorporated on January 3, 1977, designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players and sells a variety of related software, services, peripherals, networking solutions and third-party digital content and applications. The Company’s products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud and a variety of accessory, service and support offerings. The Company offers a range of mobile communication and media devices, personal computing products and portable digital music players, as well as a variety of related software, services, peripherals, networking solutions and third-party hardware and software products. In addition, the Company offers its own software products, including iOS, the Company’s mobile operating system; OS X, the Company’s Mac operating system; and server and application software. The Company’s primary products include iPhone, iPad, Mac, iPod, iTunes, Mac App Store, iCloud, Operating System Software, Application Software and Other Application Software. – Reuters
