Apple's Services Growth Thesis Remain Intact

Credit Suisse in a note termed Apple Inc.'s AAPL fiscal year second quarter results as "OK" and noted that Services thesis is intact.

Services grew 18 percent year-over-year, with strong App store growth of 40 percent. The firm attributed the slight deceleration in sales to an extra week in the December quarter in 2016 as well as the Christmas week falling in the fiscal first quarter of 2016.

Bracing For iPhone 8 Super Cycle

Analysts Kulbinder Garcha, Philip Wang and Syed Talha Saleem remain cautious on near-term units for iPhones due to the upcoming iPhone 8 cycle.

"Our installed base analysis suggests that strong growth of the installed base in the past three years will be a key driver of future growth in 2018, driven by an iPhone 8 super cycle," the analysts said.

As such, the analysts estimate iPhone units of 224 million for the calendar year 2017, 248 million for 2018 and 257 million for 2019.

Material Potential for Apple's Services Business

Credit Suisse expects the Services business to double over the next four years, in line with the company's guidance. The firm sees material potential for the Services business, with growth being driven by the App Store, an inflection in Apple Music revenues and iCloud. Accordingly, the firm believes the business can grow from about 20 percent of gross profit in fiscal year 2016 to one-third of the gross profit, long term.

Adjusting Estimates

Credit Suisse raised its calendar year 2017 revenue estimate to $234 billion from $231 billion and calendar year 2018 estimate to $257 billion from $252 billion. The firm, however, lowered its calendar year 2017 earnings per share estimate to $9.32 from $9.51 and 2018 estimate to $11.26 from $11.44. The firm indicated it has become more conservative on units and margins, in the near term.

"Long Term, given high retention rates, a superior ecosystem, and a multi-product compute advantage, we believe FCF of ~$75bn should be sustainable," Credit Suisse said.

Credit Suisse reiterated its Outperform rating and $170 price target on shares of Apple.

In early trading, shares of Apple were down 1.70 percent at $145.

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