Technology Equity Research for Apple by Gurinder Kalra

•     Target Price of $390. Our price target is based on a 12.5x multiple of our $31.14 FY12 EPS estimate. We would normally assign a higher multiple to such a high-growth company, but we realize that wide ownership and AAPL’s index weighting will likely keep a cap on valuation metrics in the near future. We believe the Street’s estimates of $24.63/$28.54 in FY11/12 are overly conservative and indeed assume a deterioration of AAPL’s fundamentals into 2H11, a scenario we see as highly unlikely. With fundamentals intact and the stock near the bottom of its recent trading range, we see a solid trading case to own AAPL shares.
•     AAPL is riding multiple product cycles. iPhones are clearly AAPL’s workhorse device, and further carrier expansion should drive market share growth. However, iPads are yet to hit the knee of the adoption curve, and we expect sales to accelerate as component availability improves. We see declines in iPods as relatively innocuous to overall sales and accretive to corporate gross margins. We expect Mac computers to continue to gain share off what is still a relatively low base.
•     High potential for new product launches. We believe investors are not expecting a brand-new iPhone early this summer, with a fall launch seeming more likely at this point. We think the next iteration of the iPhone is likely to include an upgraded processor and an improved camera, with AAPL saving LTE and NFC functionality for future iterations of the phone. Beyond the phones, we see big potential for AppleTV (including, perhaps, actual TV sets).
•     Near term business is good. Multiple data points have emerged during the quarter that support estimates above guidance. In particular, we see iPad sales commentary at WWDC as supportive of our 6.5M unit estimate for the quarter, and NPD data on Macs suggests our 18% Y-Y growth expectations are reasonable. We think supply chain commentary on iPhone has been supportive of strong units as well.
Stock is likely range bound for now, but current price is attractive at the low end of the range. Given AAPL’s index weighting and looming CEO transition issues, we think the stock likely trades within a range between $300 and $400 in the near future. At the current price, though, we recommend buying AAPL stock as it has traded sideways recently despite improving AAPL-specific data. We see a near-term opportunity to own AAPL for solid results in the June quarter, with new growth driven by international expansion for existing AAPL products, a new iPhone launch in the fall and a possible entry into TVs in the near future. We see the TV opportunity as particularly attractive, as each 1% of market share gained could add $4B to AAPL’s top line.