Apple iPhone weakness in China is overdone, says Wells Fargo analyst

Right. Well Wells Fargo is bullish on Apple playing up the benefits of Chinas iPhone sales and AI in its new note. Aaron Rakers is the firms equity strategist. Aaron, great to have you with us. Thanks for having me. What struck me in the in the conference call Aaron is that you actually asked that very question in terms of China. We’ve gotten so many data points from a counterpoint research for instance, which shows down 919% in terms of sales. Their research shows that IDC down 10% in terms of shipments for this quarter. And you asked what are we missing here, Did you get a good answer in your view are you satisfied with with their China business? Well, I I think Tim answered the question you know spot on which is basically he could talk to his business. I mean clearly to your point counterpoint research, but even the internal smartphone data within China showed like a 30 plus percent decline at least in the first two months of this most recent quarter. So I guess the answer is somewhere you know underneath of the shipment number, you know you mentioned earlier mix, they mentioned offline that you know strong mix of iPhone 15 Pro and Pro Max. So we think that’s certainly a variable, but for them to grow, given the data points in this last quarter was pretty notable. And why we actually asked that question. What do you think the dynamics of the China market will be even in a strong iPhone cycle? Aaron, I’m just wondering because they were really relying on mix in terms of the newer phones, the more expensive phones. Is that the kind of market dynamic that we are going to expect in China? Because that would seem to me then they’re going to be ceding a lot of market share to some of the other competitors that have cheaper phones. Yeah. And and I I think it’s going to be competitive and Tim alluded to that quite a bit on the call last night. I think one other consideration is that they even grew without the tough compare when adjusting for the the impact of channel fill and such last year. So we think you know look it’s going to be a competitive market. We think there’s a a strong market in China for feature rich phones and we think the the upgrade opportunity going into the next generation iPhones later this year presents a positive driver for the company, which is why we’ve stopped by our our overweight rating. Aaron, So it’s Tim, thanks for joining. I, I see your price target it’s actually posted on the screen right now of 225. Talk about the multiple behind that and and and again you know where you are relative to the last five years in Apple. At times there’s been a real argument for a a peak Apple multiple relative to itself and do you think that’s here? Yeah. So first of all, I think you know our note going into this print was was more cautious, right. We thought maybe the stock it was going to be a tough quarter. We would, we thought we could see possibly a pull back in the shares. But clearly both the China growth but also the services growth and now kicking forward to this AI narrative, we think there’s catalyst ahead. So when we look at the valuation, we believe the stock and hold kind of a high 20 multiple if not 30 over the last five years has traded right at a medium multiple around 25. And and one other consideration I’d highlight is the fact that you know Apple you know includes stock based comp in their full earnings number. It’s about close to 10% dilution to the EPS line. So you know we think the valuation you know into that high 20 multiple range comparable to what we’ve seen over the last five years. It is justified given given the breadth of what Apple has and also the free cash flow and as you guys mentioned the capital return earlier in the call. Aaron, when you talk about Catalyst again, you know you just mentioned like heading into the print I and I said this on Monday. I, you know I would have loved to have seen just the kind of quarter that they released and nothing else. I think the stock likely would have traded down off that or been flattish. It certainly would have gapped up 8% in my opinion and then that could have set up for a decent trade if you will into WWDC. So talking about Catalyst, you’ve followed this company for a long time. They don’t really, they’re going to give us a good sense what the software looks like, but where care of AI is going to live supposedly on this device, right and enabling a bunch of services. So do you expect in the fall any whiz bang sort of product coming from Apple based on generative AI that will cause a meaningful upgrade iPhone cycle? Well, one of the things we’ve put in our note is that you know there was a research paper published by Apple back a month or so ago talking about how they’re going to use smaller models using partnerships. I know you know others today have highlighted you know Google and that’s been reported. But you know we think that they can you know do a multi modal large language model on device that that’s going to be quite attractive and and differentiated. I think you know the other thing that was brought up in a call, I mean Apple does not spend nearly the CapEx, 30-40 billion of CapEx that some of these other hyperscale cloud customers do And so we think that’s attractive in the in the financial model. And the final thing I’d highlight is just you know important to remember Apple’s been embedding AI processing neural engines in their Socs since 2017. So they have a a long track record, you know deep silicon capabilities which I think is is core to the differentiation for the story.