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Credit Suisse Initiates Apple Coverage

by , 4:50 PM EDT, August 11th, 2008

On Friday, Credit Suisse announced that they are initiating coverage of Apple with an Outperform rating and a target price in 12 months of US$200.00. Apple's changing iPhone business model is seen as a positive move for profitability.

Credit Suisse cited key factors that have allowed Apple to defy macro economic conditions. The announcement said that Credit Suisse expects Apple to grow at a multiple of the overall market for man years to come.

The investment firm noted that Apple has reduced the cost for switchers, the Intel architecture has leveled the playing field, and Apple has successfully implemented a retail strategy. The prospects of the new business model for activating the iPhone will be more profitable for Apple in the long run.

That change was labelled a reversal of course, and some mobile phone executives had predicted that Apple would have to make that change. The abandonment of revenue sharing has also made it possible for Apple to engage over 70 carriers around the world.

"And finally, Apple's move towards a traditional contract-based subsidy model has enabled it to shift the economic burden of unlocked phones to the carriers. [Emphasis by TMO.] In the previous model, an unlocked phone meant that Apple was not going to share in the highly profitable monthly carrier revenues. Now, a carrier may choose to sell a phone without a contract, but Apple still gets the same wholesale price for the phone (with the subsidy baked in). We believe this provides a higher degree of certainty to Apple's earnings and cash-flow stream," Credit Suisse said.

Credit Suisse expects to see US$6.66 earnings per share in 2009.

Observer Comments

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The estimate of $6.66/share for 2009 is an interesting number. It's also at least 50% too low. Credit Suisse also ignores what is--because of deferred revenue recognition accounting for the iPhone--the most important thing when it comes to Apple performance--free cash flow. The latter is and will be enormous.

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