Today Apple held its annual WWDC conference in San Jose with a major focus on next generation software enhancements, the unveiling of iOS 12, new AR tools, much anticipated Siri capabilities, and a handful of other software related announcements including those related to the Apple Watch. In a nutshell, this conference was all about courting the developer community which is the linchpin to the future success of Apple especially with a software/services based focus a major growth area to build on its golden iPhone success over the coming years, as Apple announced today developers have earned over $100 billion to date through the App Store, an eye-popping stat. While there were no hints around the next hardware releases (with a slew of activity expected over the next 3 to 6 months), the major focus of WWDC was around software updates rather than hardware releases with all developer eyes on the unveil of the much anticipated iOS 12. Enhanced AR capabilities and more advanced Siri additions to the platform were some of the main technology features developers were focused on at WWDC as Apple looks to keep pace with Amazon and its next generation Alexa smart speaker platform with Google also handily in the mix. Taking a step back, we believe the Street is now starting to fully appreciate the massive iPhone upgrade opportunity on the horizon for the next 12 to 18 months with three new smart phones slated for release, likely in the September timeframe although we could see the SE 2 launched over the coming months. Importantly we estimate Apple has roughly 350 million iPhones that are in the “window of opportunity” to upgrade over the next 18 months, now it’s about which model and price point strike a chord for these customers to ultimately upgrade as the iPhone X demand has softened since reaching a supply/balance level in late December. This also speaks to Apple’s decision to go down the OLED route on all designs next year (2019) according to reports out of Asia, which is a smart strategic move in our opinion given this display feature remains a key focus for smart phone consumers across various price levels with demand drivers key in this decision out of Cupertino. To this point, we still expect three new iPhone releases (5.8 inch to 6.5 inch OLED designs with an LCD model) staggered over the next 3-6 months to hit the market that will help capture the underlying demand/upgrades among customers that have decided to bypass the 8/8+/X cycle this time around, with price points and features that catalyze fence sitting iPhone customers onto their next smartphone during the course of 2018/early 2019 with Chinese consumers front and center. On the software front, WWDC launched iOS 12 heavily focused on improved performance, bug fixes, and refinements along with some new features and capabilities, coupled by new software releases for the Apple Watch 3 (watchOS 5) on the docket. Now all eyes are on the trifecta of a major iPhone product cycle for 2H2018, the recently upped buyback program, and a multiple re-rating that we believe will move shares towards the $200 range/trillion-dollar mark over the coming months. We maintain our Highly Attractive rating and $200 price target.
Catalysts ahead for Cook & Co; China and services a key focus. The massive uptick in ASPs that Apple has experienced on the heels of a modestly successful iPhone X launch, a services business which we forecast is on a trajectory to be a $50 billion annual revenue stream by FY20, and an unparalleled consumer franchise which now has 1.3 billion active devices worldwide speaks to the clear tailwinds that Cook & Co. has for the foreseeable future in our opinion as it further penetrates its massive installed base. The main swing factor in our opinion is China as we estimate over a 100 million iPhone installed base in this key region, with over half of these consumers due for an upgrade during the course of 2HFY18/1HFY19. In particular, we estimate between 60 million and 70 million Chinese iPhones will be in the “upgrade window” over the next 12 to 18 months with iPhone X/and the next launches as a major potential product catalyst in the all important Chinese market, which could see a renaissance of growth on the horizon for Cupertino. In a nutshell, while this has been a hand holding period on the name over the past six months, we believe near term demand issues (iPhone X) does not change our long term bullish thesis on Apple and the underlying demand/upgrade drivers for the next 12 to 18 months remain intact with a massive product cycle underway.