BofA: Don't Write Off Apple's Hardware Business Just Yet

Apple Inc. AAPL's valuation implies a "declining growth in hardware" moving forward, but this is unwarranted, according to Bank of America Merrill Lynch. 

The Analyst

Bank of America's Wamsi Mohan maintains a Buy rating on Apple's stock with an unchanged $220 price objective. 

The Thesis

Apple's stock is valued under the assumption that the company will see undergo a decline in hardware sales growth, Mohan said in a Tuesday note. (See the analyst's track record here.) 

This thinking is "too pessimistic" and the hardware business has a multiyear growth trajectory driven by growth in the iPhone average selling price in 2018 and 2019, and a potential new iPhone in 2020 with 5G, artificial reality and virtual reality. Sales of other hardware devices — including AirPods, HomePod and Apple Watch — remain strong.

Here is the analyst's sum-of-the-parts valuation based on bull, base and bear cases: 

• Bull: Hardware business $132 + services business $79 + cash value per share $19 = $230 per share.
• Base: Hardware business $103 + services business $57 + cash value per share $19 = $179 per share.
• Bear: Hardware business $82 + services business $40 + cash value per share $19 = $141 per share.

"Given the stock is trading at $168, in our opinion the stock is already discounting a declining hardware business and much worse than run rate services business, which is too pessimistic in our opinion," Mohan said. 

Price Action

Shares of Apple were trading higher by 0.4 percent Wednesday morning.

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Photo courtesy of Apple.