Credit Suisse F3Q17 revenue/EPS estimates are $45.4bn/$1.60 vs consensus of $44.9bn/$1.57. Credit Suisse now lowers its C3Q/4Q's iPhone unit estimate to 43.5mn/82.3mn and lower CY17 unit to 221mn from 229mn, reflecting the supply parts tightness of the OLED version, which Credit Suisse believse will start shipping in October.
However, Credit Suisse continues to highlight a degree of pent up demand from the iPhone installed base ahead of the major iPhone 8 super cycle, with CY18/19 unit estimates at 248mn/268mn, as well as a continued mix shift toward the highest end model. Credit Suisse now adjusts CY17/18/19 EPS to $9.10/$11.89/$13.11 (from $9.50/$11.95/$13.16). Credit Suisse reiterates Outperform rating and PT of $170.
Apple's installed base has seen robust growth over the past few years from 440mn at the end of 2014 to 600mn/690mn in 2015/2016 (+36%/+15% yoy), despite relatively muted 6S and 7 cycles. Credit Suisse sees the 8 Supercycle potentially unleashing the pent-up demand for the 10th anniversary iPhones, driving unit shipments to 221mn/248mn/268mn in 2017/2018/2019, with the iPhone installed base expanding to 775mn/890mn/970mn (see our note 8 Super-cycle – Rising Demand, Rising Price). Credit Suisse estimates could still prove conservative, as it assumes a replacement cycle of 31.5/31/31months in 2017/2018/2019, relatively flat vs 31months in 2016. In addition, Credit Suisse sees a strong mix of the OLED version at 48% in 2H17, rising ASPs for the coming cycle to $704 in CY18 from $647 in CY16, and growth of Services to offset the potential BOM pressure.
Credit Suisse estimates that with the existing slate of services, Services revenues could rise to $52bn long term from $26bn, driven by a high quality, affluent, digitally transacting user base of 1.1bn devices and around 650mn users. Given that GMs are around 70% for this business, it would suggest that services will contribute $39bn in GP long term from $19bn today, driving GM over 40% over time.
While a change in the valuation approach may take time, given Apple's Services growth and an installed base growing to ~1.5bn LT, Credit Suisse sees an annuity like FCF, sustainable at ~$75bn LT, justifying a valuation of $170. The risks include macro economic condition, consumer demand, and competition in the market.