Citi raises AAPL target price to $287 a share
Estimate change
* Quick Call - We remain aggressive buyers of AAPL shares at Y
current levels. Apple's decision to move from a revenue share
model to a traditional subsidy model for the 3G iPhone is a
significant positive because Apple receives iPhone-related
cash flow sooner. As a result, our free cash flow estimate
increases by $2B for FY09 and our price target increases from
$248 to $287.
* 3G iPhone - As expected, Steve Jobs unveiled a 3G version
of iPhone during Monday's Worldwide Developers' Conference
keynote. Hardware specs were generally in line with
expectations while handset pricing was well below
expectations. The biggest surprise was the speed with which
Apple is abandoning the revenue sharing model in favor of a
traditional subsidy model.
* AT&T Deal Looks Particularly Favorable - Citi wireless
analyst Michael Rollins believes that AT&T is paying Apple
$220-270 more for the 3G iPhone than the NPV of all payments
related to the original iPhone. AT&T obviously believes that
the higher upfront investment will pay off in higher
subscriber adds, higher ARPU, and lower churn.
* Raising Cash Flow Estimates - We are significantly raising
our FY09 and FY10 free cash flow estimates from $7.4B and
$8.9B to $9.3B and $10.2B, respectively, although there is
little net impact to our above-consensus GAAP EPS estimates
from the change in carrier model. The shift in carrier
payments to the point of sale also boosts FY09 and FY10
revenue by $1.4-3.2B.
Price (09 Jun 08)
US$181.61
Target price
US$287.00
from US$248.00
and more
* The $100 drop in price made possible by the carrier subsidy places the 8GB iPhone below the critical $200 price point where sales volumes typically spike. We believe the drop from $299-399 to $199 will increase Apple's global available unit market by a multiple of 3-4X, with the RAZR's significant jump in volume at $200 as an example of the potential.
* While Apple loses back-end revenue share under the subsidy model, the net present value of iPhone-related cash flows is larger than a subsidy model thanks to the earlier timing of cash receipts from carriers and the increase in iPhone's potential market due to the lower price point.
* Higher unit volumes will attract more third-party software developers to the iPhone platform, further differentiating iPhone from competing handsets. The iPhone application store on iTunes-the exclusive source for all third-party applications-will also provide incremental revenue.
