EFTA02533005

From: Richard Kahn Sent: Friday, February 2, 2018 1:47 PM To: jeffrey E. Subject: Fwd: Apple, Inc.: More Modest iPhone Growth Offset by Strong Services and Capital Return Richard Kahn HBRK Associates Inc. 575 =exington Avenue 4th Floor New York, NY 10022 tel fax cel Begin forwarded message: From: =/b>"Morgan Stanley" Subject: =/b>Apple, Inc.: More =odest iPhone Growth Offset by Strong Services and Capital Return Date: =/b>February 1, 2018 at 11:09:08 PM =ST To: =/b> Reply-To: =/b> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> Wealth =anagement <http://www.morganstanley.com/> <http://www.morganstanley.com/img/cs/spacer.gif> Apple, Inc.: More =odest iPhone Growth Offset by Strong Services and Capital =eturn <http://www.morganstanley.com/img/cs/spacer.gif> EFTA_R1_01677080 EFTA02533005 Katy L. Huberty, CFA =E2 Morgan Stanley February =, 2018 4:03 AM GMT Offsets to weaker iPhone =hipments are 1) accelerating services growth and 2) expected return of =1638 in net cash to shareholders. At 11.6x FY19 EPS of $14.50, assuming =75B incremental buyback over two years, Apple is now cheaper than most =T Hardware peers despite increasing recurring revenue. Services Acceleration and Capital Return Offset Muted iPhone =nit Outlook. On the one hand, FY18 growth will come more from ASPs =+12% Y/Y) than unit growth (+4% Y/Y) as the smartphone end market =atures, lowering our EPS by 9% in FY18. On the other hand, the Apple =latform is healthy. Device installed base grew 30% over the past two =ears and customer satisfaction is at record highs (1). This translates =o growing share of smartphone users even as overall market growth =lows. Given strong retention rates, Apple will see ASPs rise this year =ithout any slowing of user growth. In fact, Apple's share of China =martphone users accelerated post the iPhone X launch (2). Services =rowth accelerated from 22% exiting 2016 to 27% today (on an avg. weekly =ales basis), and will account for more than 30% of gross profit dollars =y 2021 (from 20% in FY17). With the stock trading at less than 12x our =y19 EPS of $14.50, we expect the company to return a considerable =ortion of its $1638 excess cash to shareholders over the next two =ears. Net, we see more positive than negative catalysts post lowered =Phone expectations. While our FY18 EPS falls to $11.85 (from $13) =eflecting slower iPhone unit growth (+4% vs. +15% previously), FY19 =ncreases to $14.50 (from $14.28) on Services led revenue growth and the =ull impact of tax reform. We see shares trading at a slightly lower =ultiple of 14x, versus 15.4x previously, to reflect slower unit growth =nd higher contribution from tax rate. However, our PT moves up slightly =o $203, from $200, as we shift to FY19 EPS of $14.50, which fully =effects the iPhone X upgrade cycle and benefits of tax reform. What we =earned from Dece This alert is sent from: Andrew Atlas, [email protected] You received this because you requested =hat you receive content and reports from: APPLE =NC. Please contact your FA if you want to unsubscribe from the =lerts. <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> Disclosures: Please see =he full report for risks, disclosures and other important =nformation. Important disclosures regarding the =elationship between the companies that are referenced in Morgan Stanley =esearch and Morgan Stanley Wealth Management research are available on =he Morgan Stanley Wealth Management disclosure website at https://www.morganstanley.com/online/researchdisclosures. 2 EFTA_R1_01677081 EFTA02533006 Morgan Stanley Wealth Management Not Acting as Municipal =dvisor Morgan Stanley Wealth Management is not acting as a municipal =dvisor to any municipal entity or obligated person within the meaning =f Section 158 of the Securities Exchange Act (the "Municipal Advisor =ule") and the opinions or views contained herein are not intended to =e, and do not constitute, advice within the meaning of the Municipal =dvisor Rule. Copyright The =opyright in materials provided by Morgan Stanley is owned by Morgan =tanley & Co. LLC. Morgan Stanley Wealth Management is the trade =ame of Morgan Stanley Smith Barney LLC, a registered broker-dealer in =he United States. © 2018 Morgan Stanley Smith Barney LLC. Member =lPC. <http://www.morganstanley.com/imecs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> 3 EFTA_R1_01677082 EFTA02533007