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Invest in Aapl, Iphone 7 Flop Is Priced in

In: Business and Management

Submitted By jrv09
Words 1555
Pages 7
Intro: Today, my 2017 revenue forecast looks outlandish compared to the Street. I ask anyone who is dismissive based on that fact to ask themselves: What data do we have today that suggests the iPhone 7 will be far less successful than both the iPhone 5 and the iPhone 6? The iPhone 6-era produced more growth than the iPhone 5-era (trend is in the right direction), AAPL is opening more retail stores in China now than ever before, China’s middle class is growing at a rate of 10% (assuming China GDP growth of 7%) and is expected to be 1.5x the size of the US middle class in 2017, and 30% of iPhone buyers are switching from Android. Although it was arguably reasonable for analysts to sound the alarm bells from 2013 through 2014 because era-over-era growth dropped from 563.3% (iPhone 4-era) to 51.1% (iPhone 5 era), it is unfounded today given a conservative iPhone 6 era-over-era growth estimate of approximately 63% (30%+ per year). This report focuses on the iPhone because it generates nearly 70% of AAPL revenue and 100% of growth. I bought AAPL on 2/16/2016 at $95.0 because the Street’s 2017 revenue and earnings estimates are irrationally low.
Thesis Summary: * The Street focuses on QoQ growth rates and next quarter guidance, which equates to comparing every iPhone release with the previous release in order to project short to medium term iPhone revenue growth. This methodology would have an investor think that iPhone growth is slowing and the iPhone 7 will produce far lower growth than the 5 (~25%/year) or the iPhone 6 (~30%/year) * The reasonable/rational way to think about iPhone growth is “era-over-era” because all iPhone releases are not comparable and one ought to expect AAPL's revenue growth to be lumpy. I refer to this business model as a “dud by design” strategy. * Therefore, short to medium term growth rates are irrationally downgraded on a…...

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