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Equity Analyst Angelo Zino, CFA

June 08, 2021

Highlights

We expect sales to rise 28% in FY 21 (Sep.) and 2.8% in FY 22. AAPL is seeing significant momentum for its 5G enabled iPhone 12 devices, specifically related to its larger-screen phones and in China (up 87% in Mar-Q). We think double-digit percentage growth in AAPL’s installed base, higher paid subscriptions (660M plus; 40M added in Mar-Q alone), and bundling opportunities will allow Services to grow at a
15% plus clip despite tough comparisons ahead (up 27% in Mar-Q). We think Wearables can sustain a 20% growth pace, driven by the Apple Watch/AirPods/AirTags, while augmented reality glasses and an Apple car represent longer-term revenue drivers. AAPL posted iPad growth of 79% and Mac increase of 70%, reflecting the ongoing benefits from the pandemic.

We see the gross margin widening to 40%-41% in FY 21 and FY 22 versus 38% in FY 20. We like the recent Services margin expansion (70.1% in Mar-Q vs. 65.4% a year earlier) while the hardware margin appears to finally be improving (36.1% vs. 30.3% a year earlier).

We like AAPL’s net cash position of $88 billion (aims to be net cash neutral over time), with our view of annual free cash flow potential of $90 billion or more driving share repurchases.

Investment Rationale/Risk

Our Buy reflects our view of AAPL’s ecosystem, high customer retention rates, and expanding addressable market in Services/Wearables. We see stable replacement cycles from 5G expansion and robust free cash flow aiding growth initiatives/shareholder return. While we see near-term upside potential to forward
consensus estimates, we believe it will largely come from hardware, which is not as highly valued to investors as Services. We think AAPL’s pipeline remains attractive (e.g., AR glasses, Apple car, health care, shift towards hardware as a service) while Huawei issues create a better competitive landscape. We see the 2021 fall iPhone lineup looking similar to 2020’s (4 devices at same starting point).

Risks to our recommendation and target price include less success with product launches/ innovations, longer-than-expected hardware replacement cycles, potential higher tax rate, and regulatory scrutiny within its Services business.

Our 12-month target of $160 is based on a P/E of 30.8x our FY 22 EPS estimate of $5.20, above peers. We believe an aging and growing installed base of 1 billion-plus phones will allow AAPL to see growth through FY 22 and support greater penetration for Services.