EFTA00704480.pdf

From: Richard Kahn To: "jeffrey E." <jeevacation®gmail.com> Subject: Fwd: AAPL Update / Hedge Large Cap Exposure in QQQ Date: Wed, 03 May 2017 13:51:44 +0000 Inline-Images: image002.jpg; image003.jpg; image004.jpg; image005.jpg; image006.jpg; image007.jpg; image008.jpg; image009.jpg FYI Richard Kahn HBRK Associates Inc. 575 Lexington Avenue 4th Floor New York, NY 10022 tel fax cell Begin fonvarded message: From: "Ens, Amanda" •< > Subject: RE: AAPL Update / Hedge Large Cap Exposure in QQQ Date: May 3, 2017 at 9:51:09 AM EDT To: Richard Kahn Rich, the AAPL May 19th $150 calls are trading at 0.25/0.26 (ref $144.52) From: Ens, Amanda Sent: Wednesday, May 03, 2017 8:41 AM To: leffrey E.' leevacation@gmail.com>; 'Richard Kahn' Subject: AAPL Update / Hedge Large Cap Exposure in QQQ Apple Inc, (-1% $146; +27% ytd) — key debate issues: lower accrual of QCOM royalty benefit on gross margin (see table below), Services growth deceleration to 18% from 20%+ (adj for lx — still ok), China (weak sales due to increased 6/65 competition)...next catalyst WWDC in June where potentially new products may be launched (SIRI speaker?)...Wamsi rates Buy / PT $iss...longer-term holders likely adding -$144-145 AAPL report attached: More controversies than expected, but reiterate Buy ahead of iPhone 8 cycle • Shares likely to be under near term pressure due to: Apple could be accruing for QCOM royalties at a lower rate vs. history and we estimate a -100bps q/q tailwind to GMs, which came at high end of guide. Services growth decelerated from 20%+ to 18%. China growth was weak despite easy comps as sales of 6/6S more challenged given no form factor update and market turning more competitive. China is mixed: high end demand is strong but older models are facing competition, especially with FK headwinds. • There could be a pause in momentum in the short term following concerns that we think aren't well understood (service deceleration in particular). However, we continue to remain buyers for the iPhone 8 given; Increased capital return (up by $50bn) and the expected return of another $89bn over 2 years (12% of mkt cap). Potential for significant cash repatriation, for M&A or cap returns. iPhone 8 super long cycle with higher ASPs. EFTA00704480 • Our PO of $155 is unchanged, based on 14x C18E EPS of $11.14. ; t1cid:image004.jpg@0lD2C3EC.373F9E20 ;1cid:image007.jpg@0lD2C3EC.373F9E20 Hedge Large Cap Exposure in QQQ With AAPL trading lower pre-mkt after earnings ($146.03 last), FB earnings today and QQQ at all-time highs as of yesterday's close, consider hedging long exposure or instituting new shorts ahead of upcoming events (French Election, Fed (2PM Today), Payrolls Friday) as QQQ looks especially vulnerable to a FB negative earnings surprise and/or bearish Macro data. Vol Story: Put skew is elevated with 2M 90-97.5 skew in the 96th%-ile over a 2yr lookback, take advantage of this elevated skew via put spreads Trade: Buy the QQQ June (6/30) 127-134 put spread for $1.10 (ref 137.13, 5.4x net payout, 21 delta) 2M 90-97.5 Put Skew Elevated (2yr Lookback): EFTA00704481 Source: Bloomberg Amanda Ens Director Bank of America Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated One Bryant Park, 5th Floor, New York, NY 10036 Phone: Mobile: Global Research Pro BofAML Logo Apple Inc. More controversies than expected, but reiterate Buy ahead of iPhone 8 cycle Reiterate Rating: BUY PO: 155.00 USD I Price: 147.51 USD Equity I 03 May 2017 Key takeaways • Some controversies around gross margins relative to QCOM, services trajectory and China weakness • Bull thesis is iPhone 8 super long cycle, higher ASP for iPhone 8, larger capital return authorization, increased dividend • The biggest risks remain FX and commodity pricing that can change the ASP/GM for the iPhone 8 followed by China FULL REPORT Qualcomm royalty questions; Services, China growth Shares of Apple could be temporarily under pressure given the following concerns: (1) gross margins likely benefited q/q from lower accrual of QCOM royalties by our estimate (Fig 1), (2) services growth deceleration from 20%+ to 18% although some adjustments (Fig 2) alleviate these concerns, (3) China growth weak despite easy comps as sales of 6/6S more challenged given no form factor update and market turning more competitive, and (4) a slower rate of switching when adjusted for the China slowdown. However, despite these concerns, we continue to like: (1) the increased capital return (up by $50bn) and the expected return of another $89bn over 2 years or 12% of market cap, (2) potential for EFTA00704482 significant cash repatriation and associated optionality for incremental capital return and M&A, (3) iPhone 8 super long cycle with higher ASPs, and (4) increased traction in services including App Store, content, Music, Apple Pay, etc. Reiterate Buy. Gross margins and ASP puts and takes In our opinion Apple could be accruing for QCOM royalties at a lower rate vs history, which Apple deems appropriate and we estimate a —100bps q/q tailwind although there are many moving pieces (see Fig 1 for details). We expect Dec to March bridge of GM as FX (-100bps q/q), volume leverage (-50bps), commodity pricing (-50bps) vs warranty accrual (+50bps), positive mix (+100bps) as the remaining moving pieces. The ASP q/q decline of $40 can be explained by $14 for FX and $26 for seasonally lower memory capacity of iPhones. Apple Watch (est $4.7bn LTM revs)i- beats (est $500mn) + airpods (-200mn although supply constrained) are as large as a fortune 500 company ($5bn). Main risk remains FX and commodities into iPhone 8 cycle We model GM in 2H17 to remain robust given our expectation of ASP increases on iPhone 8, however potentially large swing factors include: (1) FX (particularly relative to China which faced a 5% headwind and weaker demand), (2) tight commodity pricing (memory), where management noted a continued tight market (positive for WDC). Adjusting estimates, PO stays at $155 Our PO of $155 is unchanged, based on 14x C18E EPS of $11.14. Wamsi Mohan Research Analyst MLPF&S This report is intended for c alBofAML logo Click here to access the Research Library Road the research report. available through the link above, for complete information including important disclosures and analyst certification(s). The research report and the link to such report are for the use of Bank of America Merrill Lynch customers only and all copying. redistribution, retransmission, publication, and any other dissemination or use of the contents thereof are prohibited. There may be more recent information available. Please visit one of the electronic venues that carry BofA Merrill Lynch Global Research reports or contact your Bank of America Merrill Lynch representative for further information. tank of America Merrill Lynch" is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Click here to stop or modify the delivery of Research via Emails. 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