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Morgan Stanley Raises iPhone Estimates And Apple's Price Target

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Morgan Stanley ’s Apple analyst, Katy Huberty, increased her fiscal 2016 iPhone unit growth rate from 3% to 7% and can see a realistic upside to 12%. She also increased her price target from $155 to $162 based on a fiscal 2016 EPS estimate of $10.52 (up from $10.29). (Note that I own Apple shares).

There is a huge amount of information in Huberty’s report not just on Apple but other players in the smartphone market. I’ve highlighted a few of the nuggets on Apple below.

More users plan to upgrade

Morgan Stanley’s latest AlphaWise survey indicates an accelerated upgrade cycle for Apple’s iPhone in both the US (minor uptick from 58% to 60%) and China (large increase from 49% to 74%). The survey also shows that iPhone loyalty is at all time highs of 93% in the US (which is close to Kantar’s 87% data) and 80% in China (up from 75%).

The survey also indicates that Chinese users are willing to spend more money on their next smartphone, which is being driven by the Chinese carriers 4G rollout and the natural desire of consumers to move up-brand, which plays into Apple’s wheelhouse.

Replacement cycles seem to be shortening

The AlphaWise survey points to replacement cycles shortening and this is even before the US carriers have fully moved away from the subsidy model and Apple’s Upgrade Program has been implemented. This mirrors Gazelle’s increased requests to trade-in iPhones vs. a year ago.

The results indicate a 9 percentage point increase from 29% to 38% of respondents planning to upgrade in the next year in the US and for China the shift is from 69% to 75%.  The Chinese increase should help offset what appears to be a slower uptake of the iPhone 6s vs. the iPhone 6 a year ago.

Apple gaining share in China

The survey’s results have 47% of US smartphone buyers planning on purchasing an iPhone, up from 38% a year ago and 42% of high-end buyers in China (up from 40% a year ago). The 47% for the US would match Kantar’s iPhone share data from a year ago when the iPhone 6 became available but the 42% in China is higher than the 27% that Kantar estimated a year ago. It looks like the China difference is due to Morgan Stanley’s data relating to high-end buyers vs. Kantar’s total market survey.

Huberty’s $162 price target is fairly reasonable

Huberty’s $162 price target is fairly reasonable based on a 15.4x PE multiple for her 2016 EPS estimate of $10.52. However her EPS estimate is significantly above the Street’s $9.79. Using her PE multiple assumption on the Street’s EPS estimate derives a $151 price target or 35% higher than the current $111.50.

Huberty’s $162 price target is a bit above Citi’s $145 but significantly below Brian White’s $200 which I believe is too aggressive.