North America Equity Research

30 January 2019

Overweight
Apple AAPL, AAPL US
Price: $154.68
F2Q19 Guide Meets Low-Bar and Bookends Volume
Price Target: $228.00
Downside; Should Drive Focus Back on Services
Oppty; Remain Overweight

This quarter was clearly about investors putting bookends around downside risks to Telecom & Networking
Apple’s iPhone unit volume outlook and the F2Q19 revenue guidance of $55-$59 bn Equipment/IT Hardware
managed to reassure investors that volume risks are largely priced in the shares at Samik Chatterjee, CFA
AC

current valuation. As we had previewed in our Jan 28 report, buy-side expectations (1-212) 622 0798
going into the announcement were low and below sell-side revenue consensus of $59 [email protected]
bn, which in part should drive a positive reaction to the F2Q19 revenue guide today. J.P. Morgan Securities LLC
Beyond the F2Q19 guidance, which we believe implies 20%+ y/y decline in iPhone Joseph Cardoso
shipments, investors will look for improvement in y/y volume trends (although still (1-212) 622-9036
declining) in the remainder of the year, leading to low double-digit percentage volume [email protected]
J.P. Morgan Securities LLC
declines for the year. Outside of the focus on iPhone volumes, there were other silver
linings in the report relative to new disclosures on the Services segment, including Bharat Daryani
(91-22) 6157 3057
gross margin of 62.8% in F1Q19, which we believe was at the high-end of investor
[email protected]
estimates going into the announcement. Additionally, Services gross margin
J.P. Morgan India Private Limited
improvement of +450 bps y/y and +170 bps q/q in F1Q19 is likely to increase investor
confidence in long-term expansion of gross-margins with increasing scale of various Price Performance

services opportunities. We believe the better than expected Services margin is likely to 240

drive upside to investor expectations for intrinsic value of AAPL shares, led by: 1) 200
higher portion of the company's profits coming from Services, which investors assign $
160
a higher multiple to relative to the hardware-centric businesses; and 2) increase
investor confidence in assigning a premium valuation to the Services opportunity 120
Jan-18 Apr-18 Jul-18 Oct-18 Jan-19
relative to hardware businesses. Although yesterday's announcement will do little in AAPL share price ($)
terms of addressing some of the medium-term concerns investors have relative to the S&P500 (rebased)
YTD 1m 3m 12m
drivers of revenue growth as the smartphone cycle matures, we believe book-ending
Abs -1.9% -1.0% -27.1% -7.9%
the downside on volumes will help in driving investor focus back to the Services Rel -7.2% -7.2% -27.1% -0.4%
opportunity. We maintain our Overweight rating on a combination of medium-term
earnings growth, multiple re-rating to more appropriately reflect the Services
opportunity, and balance sheet optionality.
 F1Q19 (Dec-end) results in line with pre-announcement. Total revenues tracked
at $84.3 bn (vs. JPMe and consensus of $84.0 bn, and guidance of $84 bn), including
iPhone of $52.0 bn (vs. JPMe of $51.8 bn), iPad of $6.7 bn (vs. JPMe of $6.5 bn),
Mac of $7.4 bn (vs. JPMe of $7.0 bn), Services of $10.9 bn (vs. JPMe of $10.8 bn),
and Wearables, Home and Accessories of $7.3 bn (vs. JPMe of $8.0 bn). Gross
margin tracked in-line (38.0% vs. JPMe of 38.1% and consensus of 38.0%, guidance
of 38%) driving EPS of $4.18 vs. JPMe of $4.20 and consensus of $4.17.

Apple Inc. (AAPL;AAPL US)

FYE Sep 2016A 2017A 2018A 2019E 2019E 2020E 2020E 2021E 2021E Company Data
(Prev) (Curr) (Prev) (Curr) (Prev) (Curr) Price ($) 154.68
EPS (pro forma) ($) Date Of Price 29 Jan 19
Q1 (Dec) 3.18 3.36 3.89 4.20A 4.18A 4.87 4.73 5.71 5.49 52-week Range ($) 233.47-142.00
Q2 (Mar) 1.90 2.10 2.73 2.44 2.32 2.88 2.85 3.71 3.46 Market Cap ($ bn) 738.33
Q3 (Jun) 1.42 1.67 2.34 2.12 2.03 2.59 2.54 3.12 3.03 Fiscal Year End Sep
Q4 (Sep) 1.67 2.07 2.91 2.89 2.81 3.31 3.33 3.71 3.72 Shares O/S (mn) 4,773
FY 8.18 9.19 11.87 11.65 11.35 13.65 13.45 16.25 15.70 Price Target ($) 228.00
Bloomberg EPS FY ($) 8.27 9.00 11.79 - 11.97 - 13.44 - 14.75 Price Target End Date 31-Dec-19
Source: Company data, Bloomberg, J.P. Morgan estimates.

See page 8 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.

www.jpmorganmarkets.com
71
Samik Chatterjee, CFA North America Equity Research
(1-212) 622 0798 30 January 2019
[email protected]

 F2Q19 (Mar) guidance was in line on revenue and met low-bar of investor
expectations. Apple guided to F2Q19 revenue in the range of $55-$59 bn for F2Q
(vs. JPMe of $56.7 bn and consensus of $59.0 bn heading into the announcement),
which includes $1.3 bn negative FX impact. Despite the in-line revenue guidance,
gross margin outlook was modestly disappointing (range of 37.0%-38.0% vs. JPMe
and consensus of 38.0% heading into the announcement), although explained largely
by loss of leverage on lower volumes as well as a headwind of -90 bps y/y and -60
bps q/q from unfavorable FX. As we look to the remainder of the year, we believe
the combination of moderating FX headwinds (were currencies to hold at current
levels) and increasing memory price tailwinds are likely to help drive a sequential
improvement in gross margins from F2Q19 levels.

 Services momentum continued, helped by growth in installed base of devices.

Services revenue was $10,875 mn in F1Q19 (vs. JPMe of $10,761 mn), implying
growth of +19% y/y, led by strength from the App Store, Apple Pay, Cloud Services
(+40% y/y), Apple Care, App Store Search Ad business and Apple Music (50 mn+
paid subscribers). The strong Services revenue growth included paid subscriptions of
360 mn in F1Q19 (vs. 330 mn in F4Q and 240 mn a year ago) and the company now
expects paid subscriptions to exceed 500 mn during 2020, placing it well on track of
reaching its target Services revenue by FY20 ($50 bn adjusted for accounting
changes). However, at the same time Apple highlighted certain factors driving a
modest deceleration in Services growth trends, relative to the strength in recent
quarters, including: 1) FX impact: 60% of services revenue is derived outside U.S,
thereby negatively impacted by strengthening of US dollar; 2) App Store in China:
the issue of approval of new gaming titles in China was a headwind in F1Q19; and
3) Deceleration in Apple Care as it laps a year of strong performance in 2018.

 Services opportunity to be driven by installed base growth and broadening

content portfolio. Relative to the drivers of the Services opportunity for the
company, management highlighted high-single digit growth in the installed base,
which rose to 1.4 bn devices relative to 1.3 bn at end of FY17, and included 900 mn
iPhones (which rose +75 mn y/y). The other primary driver of Services growth
includes a broader services portfolio, as demonstrated with strong growth in recent
service launches including Apple Pay and Apple Music. Additionally, Apple briefly
spoke to its intent of providing original video content as well as acceleration in third-
party video subscriptions to fully leverage its installed base of Apple TV devices as
well as Airplay to fully leverage service opportunities on third-party hardware.

 Lowering estimates largely on softer gross margin estimates and higher

operating expenses. We are modestly trimming our full-year estimates for FY19E,
FY20E, and FY21E to account for lower gross margins (led by loss of volume
leverage and higher promotions) and higher operating expenses relative to our
expectations. Our December-19 price target of $228 is unchanged, with a higher
target multiple on account of greater contribution to earnings from the Services
group valued at a higher multiple in the SOTP-based valuation, offsetting the impact
of the lower earnings forecast.

72
Samik Chatterjee, CFA North America Equity Research
(1-212) 622 0798 30 January 2019
[email protected]

Investment Thesis, Valuation and Risks

Apple (Overweight; Price Target: $228.00)
Investment Thesis
We rate AAPL shares Overweight given our favorable outlook on iPhone and
Services revenues relative to investor expectations, catalysts to accelerate revenue
growth, and upside risk to our base forecast for +14% earnings CAGR. We see
upside on several aspects of the business as well as financials that remain
underappreciated by investors, namely the transformation of the company to
Services, growth in the installed base, technology leadership, and optionality around
capital deployment ― all of which together leads us to expect double digit earnings
growth and a modest re-rating for the shares.
Valuation
We maintain our December 2019 price target of $228, which is predicated on a 17.1x
blended P/E multiple, which implies a re-rating from NTM trading multiple of 13.0x.
Our blended P/E is arrived at based on a SOTP methodology using 11.0x P/E for
iPhones, 10.0x for Mac and iPad devices, 25x for Services, and 22.5x for Apple
Watch, and 10.0x for Other Products.
Key assumptions used in formulating the price target are:
 iPhone: We use an 11.0x P/E multiple for our iPhone earnings estimate in
calendar 2020, modest discount to the 14.0x multiple that industry leader Nokia,
traded at from 2005 to 2010 when the firm had a leadership position in feature
phones.
 Mac devices: P/E multiple of 10.0x, modest premium to the 9.5x NTM P/E
multiple for competitor HPQ, largely subject to similar industry dynamics,
although with higher profitability.
 iPad devices: P/E multiple of 10.0x, in line with the multiple we assign for Mac
devices as growth opportunities are limited for both notebooks as well as tablets.
Additionally, we believe increasing consumption of content on smartphones is
likely to substitute purchases of laptops/notebooks as well as tablets in the future.
 Services: P/E multiple of 25.0x on the Services segment, in line with the average
trading multiple for a peer group of luxury/retail companies (Costco, Estée
Lauder and Home Depot), which are leaders in their respective markets and
derive a stickiness for product sales through customer loyalty in the form of
either membership programs or brand value. We believe the subscription nature
of Apple’s Services segment, with high visibility of revenue and earnings,
warrants it being valued in line with the leading luxury/retail companies.
 Apple Watch: P/E multiple of 22.5x, modest discount to 25.0x target multiple we
use for the Services group, on account of lower margins and cyclical growth
outlook tied to product cycle relative to Services.
 Other Products: P/E multiple of 10.0x, in line with legacy hardware devices like
iPad, and Mac.

73
Samik Chatterjee, CFA North America Equity Research
(1-212) 622 0798 30 January 2019
[email protected]

Table 1: AAPL P/E Based Price Target Analysis

$ in millions, except per share amounts
NTM
Qtrs 1-4 CY20E
JPM Net Income 53,093 58,158
JPM EPS $11.89 $14.22

P/E Multiple 13.0x

JPM P/E Multiple 17.1x
Total Equity Value 738,327 991,601

Average Diluted Share Count 4,773.3 4,346.9

Implied Share Price $154.7 $228.0

Current Value per Share $154.7 $154.7

Upside vs. Current 47%

Memo:
(-) Net Cash/(Debt) 96,888 77,504
Enterprise Value 641,438 914,097
JPM EBITDA 73,798 80,524
Implied EV/EBITDA 8.7x 11.4x
Source: J.P. Morgan estimates.

Risks to Rating and Price Target

Industry Downside Risks
Deceleration or contraction in the handset and smartphone market could be
faster than expected
Economic conditions or shifting consumer demand could cause greater-than-
expected deceleration or contraction in the handset and smartphone markets. This
would negatively impact Apple’s prospects for growth, and the shares may fail to
achieve our target price as a result.

Increase in competitive pressures in international markets

Apple is increasingly participating in international markets, such as China and India,
where local players, which are better situated, could leverage their position and pull
on levers such as pricing to make the market more competitive. In addition, tariffs
enacted by local governments may further hurt Apple’s ability to effectively compete
in international markets.

Company-Specific Downside Risks

Investment in new business strategies and acquisitions could be fruitless
Apple has historically invested in new business strategies and acquisitions. As such,
success on these investments has low visibility at this time and could lead to greater-
than-expected liabilities and expense. Additionally, new investments could have a
negative impact on current operations by distracting management.

Key man risk around departure of chief executive officer

While risks related to departure of management executives appear considerably
lower relative to in the past, we believe the execution on strategic priorities under
4

74
Samik Chatterjee, CFA North America Equity Research
(1-212) 622 0798 30 January 2019
[email protected]

CEO Tim Cook’s leadership does still present modest risk to the share price,
although we see a strong group of executives to support business performance
without disruptions.

Litigation with Qualcomm could drive unexpected liabilities

As part of risk mitigation from the ongoing litigation with Qualcomm, Apple has
provisioned what management believes could be worst-case payments to Qualcomm
in the event of an adverse judgement. However, less favorable outcomes with greater
damages awarded to Qualcomm could be a liability for Apple beyond the provisions,
and drive downside to our price target.

75
 Samik Chatterjee, CFA North America Equity Research
(1-212) 622 0798 30 January 2019
[email protected]

Table 2: AAPL Summary Table

$ mns
1Q - December 2Q - March 3Q - June 4Q- September Annual
2017 2018 2019 2017 2018 2019E 2017 2018 2019E 2017 2018 2019E 2017 2018 2019E 2020E 2021E
Revenue 78,351 88,293 84,310 52,896 61,137 56,677 45,408 53,265 51,720 52,579 62,900 62,287 229,234 265,595 254,993 270,226 288,963
% chg y/y 4.0% 12.7% -4.5% 4.6% 15.6% -7.3% 7.2% 17.3% -2.9% 12.2% 19.6% -1.0% 6.6% 15.9% -4.0% 6.0% 6.9%
Cost of Sales 48,175 54,381 52,279 32,305 37,715 35,402 27,920 32,844 32,242 32,648 38,816 38,792 141,048 163,756 158,716 167,342 178,489
SG&A 3,946 4,231 4,783 3,718 4,150 4,704 3,783 4,108 4,603 3,814 4,216 4,672 15,261 16,705 18,762 18,587 19,998
as % of sales 5.0% 4.8% 5.7% 7.0% 6.8% 8.3% 8.3% 7.7% 8.9% 7.3% 6.7% 7.5% 6.7% 6.3% 7.4% 6.9% 6.9%
R&D 2,871 3,407 3,902 2,776 3,378 3,826 2,937 3,701 4,034 2,997 3,750 4,139 11,581 14,236 15,901 16,966 18,250
as % of sales 3.7% 3.9% 4.6% 5.2% 5.5% 6.8% 6.5% 6.9% 7.8% 5.7% 6.0% 6.6% 5.1% 5.4% 6.2% 6.3% 6.3%
Operating Income (COI) 23,359 26,274 23,346 14,097 15,894 12,744 10,768 12,612 10,840 13,120 16,118 14,684 61,344 70,898 61,615 67,330 72,226
operating margin 29.8% 29.8% 27.7% 26.7% 26.0% 22.5% 23.7% 23.7% 21.0% 25.0% 25.6% 23.6% 26.8% 26.7% 24.2% 24.9% 25.0%
bp chg y/y -155 bp -6 bp -207 bp -102 bp -65 bp -351 bp -14 bp -4 bp -272 bp -15 bp 67 bp -205 bp -89 bp -7 bp -253 bp 75 bp 8 bp
Other income/(expense) 821 756 560 587 274 300 540 672 300 797 303 300 2,745 2,005 1,460 1,100 1,100
Pre-tax Income 24,180 27,030 23,906 14,684 16,168 13,044 11,308 13,284 11,140 13,917 16,421 14,984 64,089 72,903 63,075 68,430 73,326
Income Tax 6,289 6,965 3,941 3,655 2,346 2,205 2,591 1,765 1,883 3,203 2,296 2,532 15,738 13,372 10,561 11,633 12,355
tax rate % 26.0% 25.8% 16.5% 24.9% 14.5% 16.9% 22.9% 13.3% 16.9% 23.0% 14.0% 16.9% 24.6% 18.3% 16.7% 17.0% 16.9%
Net Income 17,891 20,065 19,965 11,029 13,822 10,840 8,717 11,519 9,257 10,714 14,125 12,452 48,351 59,531 52,514 56,797 60,971
Diluted EPS $3.36 $3.89 $4.18 $2.10 $2.73 $2.32 $1.67 $2.34 $2.03 $2.07 $2.91 $2.81 $9.19 $11.87 $11.35 $13.45 $15.70
Diluted Shares (avg.) 5,328 5,158 4,773 5,262 5,068 4,673 5,233 4,927 4,550 5,184 4,848 4,432 5,263 5,016 4,628 4,224 3,883
EBITDA ex-equity income 26,346 29,019 26,741 16,429 18,633 15,352 13,122 15,277 13,581 15,604 18,872 17,612 71,501 81,801 73,286 78,752 84,448
% chg y/y -0.9% 10.1% -7.9% -0.2% 13.4% -17.6% 3.9% 16.4% -11.1% 9.1% 20.9% -6.7% 2.2% 14.4% -10.4% 7.5% 7.2%
EBITDA margin 33.6% 32.9% 31.7% 31.1% 30.5% 27.1% 28.9% 28.7% 26.3% 29.7% 30.0% 28.3% 31.2% 30.8% 28.7% 29.1% 29.2%
bp chg y/y -166 bp -76 bp -115 bp -151 bp -58 bp -339 bp -92 bp -22 bp -242 bp -86 bp 33 bp -173 bp -134 bp -39 bp -206 bp 40 bp 8 bp
Cash 246,090 285,097 245,035 256,841 267,226 225,166 261,516 243,743 211,618 268,895 237,100 210,290 268,895 237,100 210,290 191,156 172,551
Debt 87,549 122,400 114,730 98,522 121,840 114,730 108,339 114,600 114,730 115,680 114,483 114,730 115,680 114,483 114,730 114,730 114,730
Gross Leverage (ttm) 1.3x 1.7x 1.4x 1.4x 1.6x 1.5x 1.5x 1.5x 1.5x 1.6x 0.9x 1.6x 1.6x 1.4x 1.6x 1.5x 1.4x
Net Debt (158,541) (162,697) (130,305) (158,319) (145,386) (110,436) (153,177) (129,143) (96,888) (153,215) (122,617) (95,560) (153,215) (122,617) (95,560) (76,426) (57,821)
Net Leverage (ttm) -2.3x -2.2x -1.6x -2.3x -1.9x -1.4x -2.2x -1.6x -1.3x -2.1x -1.0x -1.3x -2.1x -1.5x -1.3x -1.0x -0.7x
Operating Cash Flow 27,056 28,293 26,690 12,523 15,130 6,916 8,363 14,488 13,075 15,656 19,523 25,526 63,598 77,434 72,207 77,935 78,309
Capital Expenditures (3,334) (2,810) (3,355) (2,975) (4,195) (3,401) (2,277) (3,267) (3,103) (3,865) (3,041) (3,426) (12,451) (13,313) (13,285) (13,649) (13,819)
Free Cash Flow 23,722 25,483 23,335 9,548 10,935 3,515 6,086 11,221 9,972 11,791 16,482 22,100 51,147 64,121 58,922 64,286 64,490
Share repurchases (10,851) (10,095) (8,796) (7,161) (22,756) (20,000) (7,093) (20,783) (20,000) (7,795) (19,104) (20,000) (32,900) (72,738) (68,796) (70,000) (70,000)
Source: Company reports and J.P. Morgan estimates

76
Samik Chatterjee, CFA North America Equity Research
(1-212) 622 0798 30 January 2019
[email protected]

Apple: Summary of Financials

Income Statement - Annual FY17A FY18A FY19E FY20E FY21E Income Statement - Quarterly 1Q19A 2Q19E 3Q19E 4Q19E
Revenue 229,234 265,595 254,993 270,226 288,963 Revenue 84,310A 56,677 51,720 62,287
COGS (141,048) (163,756) (158,716) (167,342) (178,489) COGS (52,279)A (35,402) (32,242) (38,792)
Gross profit 88,186 101,839 96,278 102,884 110,474 Gross profit 32,031A 21,274 19,477 23,495
SG&A (15,261) (16,705) (18,762) (18,587) (19,998) SG&A (4,783)A (4,704) (4,603) (4,672)
Adj. EBITDA 71,501 81,801 73,286 78,752 84,448 Adj. EBITDA 26,741A 15,352 13,581 17,612
D&A (10,157) (10,903) (11,671) (11,422) (12,222) D&A (3,395)A (2,607) (2,741) (2,927)
Adj. EBIT 61,344 70,898 61,615 67,330 72,226 Adj. EBIT 23,346A 12,744 10,840 14,684
Net Interest - - - - - Net Interest - - - -
Adj. PBT 64,089 72,903 63,075 68,430 73,326 Adj. PBT 23,906A 13,044 11,140 14,984
Tax (15,738) (13,372) (10,561) (11,633) (12,355) Tax (3,941)A (2,205) (1,883) (2,532)
Minority Interest - - - - - Minority Interest - - - -
Adj. Net Income 48,351 59,531 52,514 56,797 60,971 Adj. Net Income 19,965A 10,840 9,257 12,452
Reported EPS 9.19 11.87 11.35 13.45 15.70 Reported EPS 4.18A 2.32 2.03 2.81
Adj. EPS 9.19 11.87 11.35 13.45 15.70 Adj. EPS 4.18A 2.32 2.03 2.81
DPS - - - - - DPS - - - -
Payout ratio - - - - - Payout ratio - - - -
Shares outstanding 5,263 5,016 4,628 4,224 3,883 Shares outstanding 4,773A 4,673 4,550 4,432
Balance Sheet & Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E
Cash and cash equivalents 20,289 25,913 20,000 20,000 20,000 Gross margin 38.5% 38.3% 37.8% 38.1% 38.2%
Accounts receivable 17,874 23,186 24,223 23,828 22,989 EBITDA margin 31.2% 30.8% 28.7% 29.1% 29.2%
Inventories 4,855 3,956 6,896 7,996 8,646 EBIT margin 26.8% 26.7% 24.2% 24.9% 25.0%
Other current assets 85,627 78,284 72,992 72,992 72,992 Net profit margin 21.1% 22.4% 20.6% 21.0% 21.1%
Current assets 128,645 131,339 124,111 124,817 124,627
PP&E 33,783 41,304 41,251 43,478 45,075 ROE 36.9% 49.4% 56.1% 85.0% 143.7%
LT investments 194,714 170,799 148,634 129,500 110,895 ROA 13.9% 16.1% 14.7% 16.7% 18.8%
Other non current assets 18,177 22,283 34,686 34,686 34,686 ROCE 19.9% 24.6% 24.6% 30.8% 38.2%
Total assets 375,319 365,725 348,682 332,481 315,283 SG&A/Sales 6.7% 6.3% 7.4% 6.9% 6.9%
Net debt/equity 71.2% 82.7% 118.3% 177.1% 302.1%
Short term borrowings 18,473 20,748 21,741 21,741 21,741
Payables 49,049 55,888 53,878 59,973 63,705 P/E (x) 16.8 13.0 13.6 11.5 9.9
Other short term liabilities 33,292 40,230 45,410 49,737 50,931 P/BV (x) 6.1 7.2 8.9 12.2 19.2
Current liabilities 100,814 116,866 121,029 131,451 136,377 EV/EBITDA (x) 9.0 7.8 8.8 8.1 7.6
Long-term debt 97,207 93,735 92,989 92,989 92,989 Dividend Yield - - - - -
Other long term liabilities 43,251 47,977 54,555 54,555 54,555
Total liabilities 241,272 258,578 268,573 278,995 283,921 Sales/Assets (x) 0.7 0.7 0.7 0.8 0.9
Shareholders' equity 134,047 107,147 80,109 53,486 31,362 Interest cover (x) - - - - -
Minority interests - - - - - Operating leverage 47.8% 98.2% 328.0% 155.3% 104.9%
Total liabilities & equity 375,319 365,725 348,682 332,481 315,283
BVPS 25.47 21.36 17.31 12.66 8.08 Revenue y/y Growth 6.6% 15.9% (4.0%) 6.0% 6.9%
y/y Growth 9.6% (16.1%) (19.0%) (26.8%) (36.2%) EBITDA y/y Growth 2.2% 14.4% (10.4%) 7.5% 7.2%
Net debt/(cash) 95,391 88,570 94,730 94,730 94,730 Tax rate 24.6% 18.3% 16.7% 17.0% 16.9%
Adj. Net Income y/y Growth 7.1% 23.1% (11.8%) 8.2% 7.3%
Cash flow from operating activities 63,598 77,434 72,207 77,935 78,309 EPS y/y Growth 12.3% 29.2% (4.4%) 18.5% 16.8%
o/w Depreciation & amortization 10,157 10,903 11,671 11,422 12,222 DPS y/y Growth - - - - -
o/w Changes in working capital (5,550) 34,694 6,464 9,717 5,116
Cash flow from investing activities (46,446) 16,066 (4,086) (13,649) (13,819)
o/w Capital expenditure (12,451) (13,313) (13,285) (13,649) (13,819)
as % of sales 5.4% 5.0% 5.2% 5.1% 4.8%
Cash flow from financing activities (17,347) (87,876) (84,008) (83,421) (83,094)
o/w Dividends paid (12,769) (13,712) (13,900) (13,421) (13,094)
o/w Net debt issued/(repaid) 29,014 432 6 0 0
Net change in cash (195) 5,624 (15,887) (19,135) (18,604)
Adj. Free cash flow to firm 51,147 64,121 58,922 64,286 64,490
y/y Growth (3.7%) 25.4% (8.1%) 9.1% 0.3%
Source: Company reports and J.P. Morgan estimates.
Note: $ in millions (except per-share data).Fiscal year ends Sep. o/w - out of which

77
Samik Chatterjee, CFA North America Equity Research
(1-212) 622 0798 30 January 2019
[email protected]

Analyst Certification: All authors named within this report are research analysts unless otherwise specified.The research analyst(s)
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78
Samik Chatterjee, CFA North America Equity Research
(1-212) 622 0798 30 January 2019
[email protected]

Apple (AAPL, AAPL US) Price Chart

385
OW $107 OW $165 OW $266
Date Rating Share Price Price Target
330
($) ($)
OW $105 OW $142 OW $270
27-Apr-16 OW 104.35 125.00
275
OW $125 OW $114 OW $176 OW $272
OW $228 16-Jun-16 OW 97.14 105.00

220
27-Jul-16 OW 96.67 107.00
Price($) 26-Oct-16 OW 118.25 114.00
165 01-Feb-17 OW 121.35 142.00
26-Mar-17 OW 140.64 165.00
110 02-Aug-17 OW 150.05 176.00
27-Sep-18 OW 220.42 272.00
55
02-Nov-18 OW 222.22 270.00
12-Nov-18 OW 204.47 266.00
0
03-Jan-19 OW 157.92 228.00
Feb May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb
16 16 16 16 17 17 17 17 18 18 18 18 19

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage May 01, 1999. All share prices are as of market close on the previous business day.Break in coverage Oct 13, 2017 - Sep 27, 2018.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
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Coverage Universe: Chatterjee, Samik: Apple (AAPL), Arista (ANET), Ciena (CIEN), Cisco (CSCO), CommScope (COMM), Corning
(GLW), F5 Networks (FFIV), Infinera (INFN), Juniper Networks (JNPR), Lumentum (LITE), Sensata (ST), Viavi (VIAV)

J.P. Morgan Equity Research Ratings Distribution, as of January 02, 2019

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 46% 40% 14%
IB clients* 53% 47% 37%
JPMS Equity Research Coverage 44% 41% 15%
IB clients* 75% 65% 56%
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79
Samik Chatterjee, CFA North America Equity Research
(1-212) 622 0798 30 January 2019
[email protected]

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10

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Samik Chatterjee, CFA North America Equity Research
(1-212) 622 0798 30 January 2019
[email protected]

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11

81
 Samik Chatterjee, CFA North America Equity Research
(1-212) 622 0798 30 January 2019
[email protected]

independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S.
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Copyright 2019 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
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