ARM: Bernstein Ups to Hold on Royalty Upside; Still ‘Over-Owned’

Bernstein Research‘s Pierre Ferragu today raises his rating on shares of semiconductor intellectual property vendor ARM Holdings to Market Perform from underperform, after concluding that the use of its more advanced “v8” chip technology by Apple (AAPL) and Samsung Electronics (005930KS) and others could mean royalties go higher than he had expected.

Ferragu raises his price target on the ordinary shares traded in London (ARM) to 1,000 British pence from a prior 750. The shares today closed down fractionally at 988 today.

ARM’s v8 architecture is used to develop 64-bit mobile chips; it saw its mainstream debut in Apple’s “A7” processor for the iPhone in 2013, and chip vendors have been working on competing 64-bit chips for other mobile device vendors to use.

Ferragu now sees a prospect of higher V8 licenses:

As a result, we see an upside risk to our 2015 forecast: we currently model ARM v8 reaching at the end of the year 50% of the high end and 25% of the low end of the smartphones & tablets, but things could play out faster: 75% of the high end (all Apple, most of Samsung and others) and 70% of the low end (virtually anything above $100). On a full year basis, this would drive royalty revenues numbers ~5% above our current forecast and an impressive string of beats throughout the year – although this wouldn’t have much of an impact on valuation: v8 will eventually be everything anyway, and this is what we model in the long term already. Today’s valuation already reflects in our view more than all of this bright future, but a fast adoption of v8 would drive a string of earnings revision, reminiscent of what happened in 2013. On that basis we recommend avoiding the stock for now and waiting for a rally before considering a short position again.

Despite the upside on royalties, the stock is over-owned, he writes, and the business is slowing:

it is a beautiful asset, groundeda high-quality and growing right to make money on a strong ecosystem. The company grows profits along with mobile devices and good pricing power, and gets a further boost from increasing penetration in micro-controllers and networking equipment. Unfortunately, the story is well understood and is now slowing down. The stock is over-owned, medium-term expectations are too high and we don’t see upside in the stock. On the contrary, we see a permanent risk of de-rating. 

Netflix: Stifel Says Buy on New Content; Mind 15% Downside Risk

Stifel Nicolaus‘s Scott Devitt today raises his rating on shares of Netflix (NFLX) to Buy from Hold, with a $380 price target, focusing on what he calls the company’s strongest lineup of original content in its history.

Devitt warns there is a risk Netflix shares could drop 10% to 15% on the next earnings call — Netflix reports December quarter earnings next Tuesday, January 20th, after market close — given that the company has been through two quarters in a row of dwindling subscriber net additions and has forecast the same for December.

However, he’s willing to tell investors to plow through that “transition risk” as the domestic story cools but the original content and the international growth take off.

We are upgrading Netflix to a Buy rating with a $380 price target. While the company continues to experience a transition between slowing subscriber growth in the profitable U.S. segment and international expansion, we believe shares in the low-$300 range provide a compelling risk-to-reward ratio given the strong content cycle, reset expectations following a few quarters of lower subscriber net adds, and recent / upcoming international launches.

Devitt goes through the list of new content coming to the streaming service:

2015 looks set to be one of the strongest content lineups in the company’s history, with many highly anticipated and long awaited content obligations coming to fruition, and likely their strongest slate of originals. Better Call Saul is set to premiere in February 2015, exclusively airing on Netflix in Europe and Latin America. The Wachowski Brothers’ new sci-fi series, “Sense8″, Marvel’s “The Defenders”, Disney rights coming to Netflix in Canada, and the premiere of Netflix’s first original movie, Crouching Tiger 2 in August. And pre-existing Netflix originals like “The Fall”, “House of Cards”, and “Orange is the New Black” are returning for new seasons as well.

As far as international expansion, he sees upside: “While 4Q may continue to be bumpy, we believe 2015 will see resumed growth from launches in Western Europe in mid-September 2014, particularly from large countries such as France, Germany, and Switzerland, as well upcoming launches.”

Netflix feared today are up 3.51, or 1%, at $327.30.

Linear Technology Jumps 5%: FYQ2 EPS Beats, Q3 Rev View Beats

Shares of chip maker Linear Technology are up $2.13, or almost 5%, at $47.30 in late trading, after the company this afternoon reported fiscal Q2 revenue that was slightly below analysts’ expectations, but beat on the bottom line, and forecast this quarter’s revenue above consensus.

Revenue in the three months ended in December rose 5%, year over year, to $352.6 million, yielding EPS of 51 cents.

Analysts had, on average, been modeling $355 million and 49 cents.

Gross profit of 75.4% was up slightly from 75.3% a year earlier and down from 76% the prior quarter.

CEO Lothar Maier said the company saw the most strength in the quarter in the industrial market for its chips, and that the company expects chip bookings to be “strong” this quarter in the automotive and industrial markets. Maier added thst “there remains some weaker pockets of the global economy.

Lothar noted the company increased its dividend by 11% after having retired its debt.

For the current quarter, the company sees revenue rising from last quarter’s level by a range by 4% to 7%. That would be $366.7 million to $377.3 million. That is higher than the average Street estimate of $365 million.

BlackBerry: Baird Cuts Estimates, Sees Trough in FYQ4

R.W. Baird‘s William Power today lowers his estimates for BlackBerry (BBRY), and cuts his price target a buck to $9, after concluding the company won’t see as much in revenue this quarter from the recently introduced “Classic” handset as he had previously thought.

Power, who has a Neutral rating on BlackBerry shares, cut his estimates for the fiscal Q4 ending in February to $746.3 million in revenue and a 3-cent net loss per share, on sales of perhaps 1.599 million BlackBerry units sold. That is down from his prior estimate for $937.3 million and break-even on the profit line, on what he had assumed was 2.05 million units sold in the quarter. The new estimate is below Street consensus for $831 million.

Power doesn’t add much color to his assessment, stating merely “We had previously assumed greater Classic device contribution in fiscal Q4, though following conversations at CES, it appears that much of that revenue may not be recognized until fiscal Q1.”

The Classic was unveiled in New York on December 17. BlackBerry CEO John Chen last week announced at CES new partnerships for distribution of the device.

Similar to another note today, from Canaccord Genuity‘s Mike Walkley, Power speculates this quarter is the “revenue trough” for BlackBerry. However, “visibility across its segments remains limited,” he writes.

For fiscal ’16, Power cut his estimates to $4.01 billion and 35 cents per share from a prior $4.32 billion and 42 cents per share. That assumes sales of 9.43 million BlackBerry units, down from a prior forecast of 10.42 million BlackBerry units.

BlackBerry stock today is down 33 cents, or 3.4%, at $9.79.

HP Gobbles Share, Apple Surges in Consolidating PC Market

The Street today is pondering yesterday’s reports by Gartner and IDC that showed PC shipments in Q4 that were above the worst expectations.

Gartner said PC shipments rose by 1%, year over year, and IDC said they fell 2.4%. The main difference between the two was the lineup of worldwide market share: Gartner said the top five was dominated by Lenovo Group (0992HK), Hewlett-Packard (HPQ), Dell, Acer Group (2353TW), and Asustek Computer (2357TW). IDC had that same lineup with the exception that it gave Apple (AAPL) fifth place behind Acer. That variance is meaningful in the sense that Apple’s worldwide sales growth of almost 19%, per IDC, was bigger than each of the other four.

The numbers haven’t exactly rallied PC names. Apple (AAPL) shares are up 17 cents at $109.37, but that’s arguably an effect of an upgrade of the stock at Credit Suisse this morning. HP shares are down 32  cents, or 0.8%, at $39.60, Intel (INTC) stock is flat at $36.60, and Microsoft (MSFT) is down 23 cents, or half a percent, at $46.37.

Big themes on the street today include: the corporate PC refresh that came with the end-of-life of Windows XP a year ago is now tapering off; some consumer sales are coming back for PCs; prices on average are declining for the market; and market share is consolidating with everyone but the top five players on average seeing declines.

Wells Fargo hardware analyst Maynard Um writes that based on the data, “We expect the overall PC market to remain stable in 2015 (we forecast a 2.1% yr/yr decline with potential for some modest upside.”

The market is consolidating further, he writes:

The market is consolidating toward the top 5 vendors, which accounted for 67.8% of the worldwide market, up from 66.8% and 65.4% in Q3 and Q2, respectively. The top 5 vendors saw a shipment growth of 9.6% yr/yr in Q4 vs. a market decline of 2.4% yr/yr. The U.S. market is even more consolidated with top 5 vendors accounting for 83.2% of the market, up from 81.2% in Q3. With several tier 2 vendors having exited the PC market (or certain regions), we believe the market will likely further consolidate likely benefitting the top vendors with scale and potentially improving their profitability.

Deutsche Bank‘s Sherri Scribner agrees things are consolidating, and sees HP increasing revenue this year, and Apple taking share:

All of the top vendors out grew the overall PC market this quarter, while the remaining PC vendors declined 21% Y/Y, to some extent reflecting the growth in developed markets and also the continued consolidation of the PC market. In our coverage, strong growth from HP suggests the company’s PC business will likely see revenue growth again this quarter, while results from Apple suggest the company is taking share both in the US and Worldwide.

J.P. Morgan‘s Rod Hall writes that the 83.7 million units that Gartner counted beat his own estimate of 81.4 million. But he’s worried Apple’s i-devices are going to further erode the PC market: “We believe that PC unit data is generally looking up for the first half of the year though ASP trends remain downward. Our main concern for the existing PC market is our Apple iAnywhere thesis which could begin to have a material negative impact this fall.”

Citigroup‘s Jim Suva writes the Gartner number was in line with his own view, and IDC’s results were close enough, even if “The nearly +2% sequential increase still underperformed its 4Q historical 5-year average of +4% QoQ.”

Noting the same consolidation effect as others, Suva writes of HP, “To its credit, we note HP has been taking a more balanced approach to market share and profitability in recent quarters, which we believe is supported by the preliminary data.”

Most of all, Suva thinks the report supports his view that “PCs could be flat in 2015 and start to see modest growth in 2016.” He thinks investors are missing a few factors:

1) emerging markets, particularly for commercial PCs, are still an area of sustainable growth, 2) tablet growth is slowing dramatically, posing less risk to PC sales, and 3) the headwind to CY15 growth, following a temporary demand boost from Win XP expiration, is more modest than investors believe. 

Raymond James‘s Michael Turits reiterates a Market Perform rating on shares of Microsoft, writing that Gartner’s 1% growth figure beat his own estimate for a 1% decline.

Turits thinks maybe there’s a penny upside to Microsoft EPS:

Based on our calculations and Gartner PC data, which indicated slightly better shipments than our forecast, we believe the total PC shipment figures indicate small possible Windows upside – making it slightly accretive to EPS ($0.004 accretion). However, relative strength in mature markets could be a positive for Windows and attach rates versus weakness in emerging markets where piracy rates are higher (attach lower). Based on legacy assumptions for Office we also expect a slightly accretive ($0.005) effect. However, given the success of Office 365, Office revenues are likely beginning to decouple from both commercial and consumer PC shipments. We calculate total upside at about $0.01 EPS to our $0.71 estimate.

Turits’s colleague, Brian Alexander, who follows the IT distributor business, issued a brief note today supporting the main observations of the Gartner and IDC reports, which is that PCs are stable and the corporate refresh of 2014 is petering out: “By product category, commercial PC sales slowed again in 4Q and appear to be normalizing; consumer PCs remain strong and are being aided by new form factors at competitive price points.”

SanDisk: Drexel Cuts to Hold on Lack of 3-D NAND, DRAM; Susquehanna Defends

Shares of NAND flash memory chip maker SanDisk (SNDK) are down 32 cents, or 0.4%, at $83.25, after the company yesterday morning cut its outlook for the December quarter’s sales, writing that it was seeing lower sales of flash at retail and lower sales of its embedded memory products for mobile.

Interestingly, shares of memory chip maker Micron Technology (MU) are rebounding, is up 33 cents at $31.99, after falling almost 6% yesterday.

The stock has gotten one downgrade today, from Drexel Hamilton’s Rick Whittington, who cut his rating to Hold from Buy, and slashed his price target to $40 from $90, writing that the problem is not current flash sales but rather the lack of a strategy in 3-D NAND chips and in DRAM:

Pricing weakness liable to fade as seasonal NAND demand returns but rising competitor 3D NAND and lack of DRAM solution. Cutting Q4 2014 non-GAAP EPS as well as 2015-2016 on reduced sales and margin expectations that could extend out in time. Long the premier NAND entity alongside partner Toshiba, SanDisk needs to show it can compete in 3D and multi-memory packaging. Intel-Micron’s prospective 3D NAND and an expected eventual strong Samsung offering could pressure SanDisk margins. DRAM looking in tight supply is becoming an integral part of packaged solutions for both smartphones and servers.

The stock has its defenders today, though. Susquehanna Financial Group‘s Mehdi Hosseini, reiterating a “Positive” rating, but cutting his price target to $112 from $120, writes that he is “disappointed,” but that the company is “not a broken story”:

It took us some time to dig into SNDK’s negative preannouncement. We believe two-thirds of the miss was driven by lower retail demand, a segment where there is little visibility until all the sell-through data is compiled (by early January). The remaining one-third of the miss is attributed to the changing market dynamics in China (where handset OEMs have been trying to reduce 4G inventories throughout 4Q) [...] We admit we missed the China factor [...] Looking into 1H15, we actually believe SNDK (that was bit capacity constrained in 2H14) can better improve product mix since there are incremental bits available as the retail segment digests inventories [...] All in all, with expectations reset, China stabilizing and showing some improvement, SSD revenue growing 20%+ (also helped by FIO contribution), and the Yen positively impacting margin profile into CY15 (+2 points GM impact for 10% decline in Yen), we find the stock risk/reward profile attractive into the earnings conference call scheduled for next week.

Hosseini cut his estimates for this year to $6.93 billion and $6.05 per share in earnings from a prior $7.13 billion and $6.41.

Apple iPhone 6 Tops the Charts, Says Canaccord; BBRY Still Struggles

Canaccord Genuity’s Mike Walkley today offers up the results of his survey of the U.S. wireless market in December and early January showed Apple (AAPL) notching big gains, causing him to raise his estimate for the company’s sales in December to 68 million units from 65 million.

Walkley, who has a Buy rating on Apple stock, and a $135 price target, conducted  surveys of online storefronts of the major U.S. carriers, and engaged in chats with representatives at physical store locations.

He writes that Apple’s iPhone had the top two slots among top smartphones in the U.S. in the last month or so. Although supply has been improving, there is still lack of supply for some configurations:

Our surveys indicated the iPhone 6/ 6 Plus smartphones were by far the top selling smartphones at all four tier-1 U.S carriers. For the iPhone 6, our surveys at 100 plus stores indicated the 16GB SKU was available in the majority of stores, the 64GB SKU was available in roughly 50-60% of the stores, and the 128GB SKU in-store availability varied by carrier. For the iPhone 6 Plus, our surveys indicated the 16GB SKU was in most stores, but the 64GB/128GB SKUs had very limited availability. Our conversations with store representatives indicated the 64GB SKUs were extremely popular with consumers, but supply for these SKUs remained tight with Apple typically replenishing store sell-outs through frequent small shipment batches.

Samsung Electronics’s (005930KS) “Galaxy Note 4” phablet came in at the number three spot at all four major U.S. carriers in December and January, he writes.

Here’s the table of results (click on the image to see it in a larger version):

Walkley also updates his findings for BlackBerry (BBRY), whose shares he rates a Hold, with a $10 price target. Surveying sales of the recently introduced “Classic,” Walkley finds “pockets of solid sales offset by soft initial sales in the U.S. market.

Walkley is lowering his hardware estimates for BlackBerry, noting that the company has switched to reporting “sell through” of devices to end users versus “sell in” to the channel.

He thinks the company probably will hit bottom in shipments in the current quarter, but will continue to struggle:

Despite our updated expectations for lower sales levels for the lower margin hardware business in Q4/F15, we believe Q4/F15 could mark the low point for hardware sales. Despite our expectations for gradually improving hardware sales and margins in F2016 due to new product introductions, we anticipate BlackBerry will continue to post operating losses through F16 given the steep decline in the higher margin Services business only partially offset by growing Software sales. Post the EZPass expiration in December, we believe BlackBerry faces the challenging task of not only selling EMM subscriptions, but it must also upsell VAS to new subscribers in a highly competitive enterprise mobility market to offset declining services revenue.

Walkley cuts his estimate for this fiscal year to $3.399 billion in sales from $3.45 billion, and now sees a 21-cent loss versus the prior 18-cent loss.

Skyworks, Qorvo: BMO Ups to Buy; Good Times for RF Keep Rollin’ in 2015

BMO Capital Markets’s Tim Long today raises his ratings on the two major remaining RF wireless chip makers, Qorvo (QRVO), which formed from the merger last year of RF Micro Devices and TriQuint Semiconductor, and Skyworks Solutions (SWKS), assigning them both Outperform ratings, up from Market Perform, and assigning an $85 target to Skyworks and an $80 target to Qorvo.

Long sees three reasons why “strong dynamics for the RF industry will continue in 2015”: Apple’s (AAPL) gaining smartphone share, Samsung Electronics (005930KS) is thinning out its portfolio, leading to more RF bands in each smartphone model; and China is still building out its 4G network.

We expect Apple (covered by Keith Bachman, BMO Capital Markets Enterprise Hardware analyst) to maintain the momentum of its market share gains on the back of iPhone 6/6 Plus. We also believe another bump in RF content is possible in the next iPhone version expected in 2H15 [...] We believe Samsung may start to increase RF content in some of its higher- end models as management looks to reduce the number of phones in its portfolio, somewhat emulating what Apple did last year. We continue to believe that China Unicom and China Telecom may both implement higher RF content in five-mode LTE phones during the 4G push this year, similar to what happened at China Mobile in 2014.

Bachman raises his Skyworks 2015 EPS estimate to $3.15 billion in revenue and $4.77 per share in net income, up from $3.06 billion and $4.59 per share, and raises his Qorvo estimate to $2.56 billion and $3.64 from $2.53 billion and $3.57.

Skyworks shares today are up $2.20, or 3%, at $74.52, while Qorvo stock is up $1.78, or 2.7%, at $67.30.

Amazon: It’s About Ebitda, Not ‘CSOI,’ Says Citi, Raising to Buy

In a note today titled “The Sun Will Come Out Tomorrow,” Citigroup analyst Mark May raised his rating on Amazon.com (AMZN) to Buy from Neutral, and raised his price target to $354 from $325, writing that the stock has support at $300 and that he sees the prospect for margin expansion this year.

The crux of May’s analysis is to urge investors to look at earnings before interest, taxes and depreciation and amortization rather than the more common profit metric for the company, “consolidated segment operating income” or CSOI, which he doesn’t think fairly reflects the business.

May starts by noting the valuation is roughly in line with retail peers Wal-Mart Stores (WMT) and Costco (COST), writes May:

At current price levels, we estimate Amazon’s retail business is trading at the traditional retailer average of 0.7x out-year GMV (this group includes WMT, TGT and COST), while its AWS/Other business is trading ~5.6x 2015 revenue versus its comp-set average of 6.8x. This is despite both businesses having dominant market positions in their respective categories and are growing well above the industry average (AMZN’s retail business is forecast to grow 15% in 2015 versus the 4% industry average, while AWS/Other is slated to grow 35% versus its comp-group at 23%). With this considered, we believe the downside risk to shares materially below the $300 level is limited.

To this who think Amazon shouldn’t get as high a multiple as Wal-Mart because Amazon’s profit margin is so low, May writes that Amazon has had higher margins in past:

However, we point out that prior to Amazon’s decision to accelerate investment in AWS and international operations in the 2011 timeframe that total company CSOI margins were in the 6% range, which is above that of the traditional retail comps despite Amazon’s faster growth.

Moreover, CSOI actually under-reports profit, he believes:

Moreover, near-term growth in CSOI may not accurately reflect the underlying growth in the business. If you agree with this view and believe capex (and therefore depreciation) is likely to stabilize in the current 5-6% of revenue level, looking at Amazon’s multiple on an EV/EBITDA basis relative to the growth in EBITDA may provide a better assessment of valuation. On this basis, Amazon currently trades at an EBITDA PEG of 0.45.

As far as growth, because Amazon is a mix of different kinds of sales — its own merchandising, plus third-party, plus the “Amazon Web Services,” or AWS, sales, he thinks focusing on revenue growth is not sensible; instead, May urges investors to look to gross profit growth, which remains higher than its cooling revenue growth.

Here’s the infographic May uses to illustrate the comparison:

May thinks investors should look past the big step-up in investment that spooked them in 2014 and focus on how that gross profit is still growing and how it could boost ebitda:

Notwithstanding these factors, we estimate the company was still able to grow retail gross profit 25% in 2014, and while we do not assume any of these issues to wholly subside in 2015, we do not expect them to worsen. As a result, we believe Amazon should continue to achieve strong gross margin improvement on both a consolidated and retail basis. With the issues from 2014 seemingly largely appreciated by the investment community and (we believe) represented in current financials, Amazon’s strong GP expansion should help re-accelerate AMZN’s operating margins in 2015. All considered, we see the company expanding EBITDA margin to its highest level in >10 years.

While CSOI margin may be 1.7% this year, up from 1.3% last year, he thinks Ebitda margin will be 8.2%, rather than 6.7% last year.

Amazon shares today are up $5.92, or 2%, at $297.33.

Apple Could do $200 Bil in Capital Returns, Says Credit Suisse, Raising to Buy

Credit Suisse’s Kulbinder Garcha this morning raises his rating on shares of Apple (AAPL) to Outperform from Neutral, and raises his price target to $130 from $110, based on what he believes is “a solid and sustainable iPhone volume base, sizeable increase in scope for cash return and EPS momentum.”

Garcha writes that 2014 was a “good year” for the company, in that the larger-screen iPhone 6 devices, and the Apple Watch, showed “the company continues to demonstrate innovation that consumers and investors crave.”

Now that Apple is the biggest market-cap name, “it is tempting to assume that all these new innovations are priced in,” he writes. “However, we believe they are not and upgrade to Outperform. We provide three basic arguments.”

The first is iPhone volume of sales, which is “looking health and strong near term.” Garcha models Apple selling 215 million iPhone units in the fiscal year ending in September before “the upgrade cycle slows to flat unit growth in 2016.”

Our proprietary install base analysis shows that Apple can reach iPhone unit volumes upwards of 215mn in FY15 if it were to acquire ~76mn users from alternative platforms and a replacement rate that accelerates globally to 21 months. We note that the faster replacement rate reflects both the pent-up demand for larger screen iPhones and the innovation that Apple has introduced in iOS 8, including new services such as HomeKit, HealthKit and Apple Pay.

Garcha notes Apple’s planned spending for this fiscal year implies the company may actually have a higher view of unit production of iPhone than he’s betting:

For FY15, Apple guided for $24.5bn purchase obligations, which is up significantly 31.8% vs. $18.6bn FY14. Historically, obligations have been a good indicator of coming iOS device volume. Again this number could be skewed by the securing of new supplies and materials for the watch, but nevertheless it is a healthy indicator. We also note that this presents a reversal from last year’s 11.6% decline. In fact, based on this, our estimate of 284mn iOS units is in line.

Second is the prospect of some gross margin improvement on iPhone:

Breaking down units, revenues and gross profits by product line, we believe that a solid mix shift towards 64GB and the iPhone 6 Plus will be gross margin accretive to the iPhone business. We assume 52% of total iPhone units will have 64GB storage sizes and 21% of total iPhone units will be iPhone 6 Plus units in FY2015, which should drive stronger GMs for the iPhone business.

Garcha cautions that he’s not expecting any “structural” change in Apple’s gross margin profile that would deliver margin expansion:

By our estimates Apple will produce global sales of some $230bn in CY2015. We note that in March 2012, when sales were 14% lower than March 2014, Apple produced GMs of 47%, whereas the same quarter in 2014 produced GMs of 39%. In other words, we are not assuming that there is any scale benefit or leverage. Despite our view on iPhone business scalability, there may typically be some improvement in iPhone and corporate GMs in the subsequent quarters following new product launches; however, we do not currently assume this will be the case in the future.

And third, Garcha assumes Apple will raise its capital returns program in a major way: to $200 billion over 3 years from the current $130 billion program:

After originally announcing its capital return program for $45bn by the end of 2015, the company has increased its program in each successive year, as shown in Exhibit 7. The cash return program now stands at $130bn to be returned over the period 2012 to 2015. In previous increases, the board conceded that the company had excess net cash in April 2012 (which stood at $110bn) that could be used to increase the capital return program. We estimate that Apple’s net cash will be at $143bn by April 2015 and as such, see it likely that management will do another increase in upcoming announcement. We now assume that Apple will announce a sizeable increase in its cash return program for the next 3 years through the end of 2017 to over $200bn of which $165bn will be buybacks and $37bn will be dividends. As shown in Exhibit 2, this means that we now have the added effect of lowered share count. We believe the likelihood of a major increase remains high. In fact, we demonstrate that if they do not increase their cash return and preserve current run rates, net cash would stand at $184bn by the end of CY2016, something that would be very difficult for Apple’s management to justify.

A boost in the capital returns program would still allow Apple to have net cash of $114 billion by the end of 2016, observes Garcha, and he offers the following infographic of how Apple’s cash can look assuming the current program is maintained and also the larger plan is implemented (click on the image to see a larger version):

Garcha’s also positive on the prospects for Apple Watch:

We assume that Apple will produce some 20mn Apple Watches in 2015, with an ASP of $400 and GM of around 50%. We believe, that the sheer SKU’s of products at the starting price of $349, as well the range of straps and screen sizes, suggest that this could be conservative. In fact, based on a proprietary survey of iPhone users, we found that approximately 18% of those who purchased either an iPhone 6 or 6 Plus said they would definitely buy the Apple Watch. That would suggest some 35mn units alone in CY15. Additionally, we believe that similar to the iPhone, the application ecosystem developing use cases around messaging, navigation, fitness and health could be meaningful to driving the attractiveness of the devices.

All this adds up to an estimate for this year of $229.52 billion in revenue and EPS of $9.44, up from his prior estimate of $207 billion and $8.04; for 2016 he sees $229.5 billion and $10.06.

Apple shares are up $1.51, or 1.4%, at $110.75 in early trading.