Apple's Valuation Range Could Be $91 To $180

Morgan Stanley’s Katy L. Huberty maintained an Overweight rating for Apple Inc. AAPL, with a price target of $135, saying that the bull case scenario implies a valuation of $180, while the bear case is $91.

“Apple has the world's most valuable technology platform with over one billion active devices,” analyst Katy Huberty said, while adding that the company appears best positioned to capture more time of its users in areas such as health, autos and home, since these platforms are set to expand with progress in the IoT [Internet of Things] space.

Bull Case Scenario: $180

iPhone demand proves better than feared and ASP rises. Investors focus on platform valuation and on Apple's accelerating Services revenue as well as a device installed base of one billion. Revenue could grow 5 percent, with flat gross margins in FY16, driven by Watch and Services. “We believe the company deserves a platform multiple of high-teens, which drives our bull case,” Huberty commented.

Base Case Scenario: $135

iPhone demand is weak in the near term, although there are long-term opportunities. “Investors price in weaker iPhone demand this cycle but remain optimistic about iPhone 7 and increasingly new markets like autos,” the analyst wrote.
Apple’s revenue impacted by strong forex headwinds and declines 3 percent in FY16. iPhone units down 7 percent and ASP down 2 percent. Gross margin contraction of 40 bps Y/Y.

“We believe stable earnings and FCF, despite FY16 being the weaker half of the two year iPhone cycle, will help the stock re-rate closer to a platform multiple, reflective of recurring revenue from Apple's loyal customer base,” the Morgan Stanley report stated.

Bear Case Scenario: $91

Disappointing iPhone units and ASPs. Revenue down 8 percent and gross margins contraction of 1 bps in FY16, mainly on account of iPhones, which is offset partially by growth in Watches and Services. “Apple continues to invest in future products and services, driving significant negative operating leverage,” Huberty said.