MIZUHO SECURITIES USA INC. | US EQUITY RESEARCH
Summary
After analyzing Apple's current situation and evaluating its potential in India, we think there are no easy solutions in the near-term. India is unlikely to offset the slowdown in China. Over the next 5 years, India can drive 4-5% of Apple's revenue but that might not be enough to move the needle in the n-t. Inorganic options are fraught with increased risk and FCF dilution. However, our LTVC analysis of Apple's customers indicate that there is value in the stock at the current price. We remain positive ($120 PT) and see an attractive risk/reward.
Key Points
■ Apple at a crossroads with no clear path to growth. The slowdown in the smartphone market combined with its significant size have made it tough for Apple to continue posting the strong growth it delivered over the last few years. Its initiatives to create a new category with Watch have delivered disappointing results. While management's focus on India is understandable, it offers unique challenges and is unlikely to yield any n-t benefits.
■ India unlikely to move the needle for Apple. Based on our extensive analysis of opportunities presented by India and its comparison with China, India is unlikely to help offset the slowdown in China due to lower wages, strong incumbents at very attractive price points, lack of carrier support and the political environment. Even if it gets full access to the Indian market, the region will likely contribute $9-10bn in revenue (4-5% of total sales), which might not be enough to move the needle. Over the next couple of years, India is unlikely to contribute more than 2-3% of total sales.
■ Inorganic initiatives are possible but present much greater execution risk. There is increased in interest in what can Apple buy to drive inorganic growth. Any such strategy is bound to create multiple new challenges for the company and will likely be dilutive to FCF in the n-t. We think a media company (Netflix or Time Warner) might make more sense than other alternatives but none of them offer relief in the n-t.
■ Reiterating Buy on Apple due to attractive risk-reward while supply chain also offers opportunities. At current price, Apple is not trading as a growth company and risk/reward seems attractive. Our analysis of the life time value of an iPhone customer indicates fair value of the stock in the $120-130 range. Within the supply chain, AVGO and NXPI offer good investment opportunities. Our Japan team recommends Sony.
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