January 18, 2023

Evercore's Amit Daryanani takes a deep dive into Apple's EPS

Posted By: ndeeney

From a note to Evercore clients that landed on my desktop Tuesday:

ALL YOU NEED TO KNOW: In light of recent Bloomberg reports highlighting AAPL’s intent to insource several iPhone components (display, modem, and Bluetooth/Wi-Fi chipsets), we think it is worthwhile to assess the potential EPS benefit to the company from developing their own silicon/display.

Fundamentally, we think this strategy is more about continuing the pace of innovation and enabling product differentiation vs. peers (think M1 vs. peer CPUs) and less about cost/margin stacking, though insourcing should benefit their financial model.

Assuming Apple can insource baseband + Wi- Fi/Bluetooth (modem, wireless, and Bluetooth integrated into a single chip) and display (less likely) for iOS devices (iPhone and iPad) for a cost that is similar to that of its respective suppliers for each component (our “blue sky” scenario), we think AAPL can achieve as much as ~$0.45-0.50/sh in annual EPS benefit (~7% of current consensus CY25 EPS).

Our bull case assumes that AAPL can achieve a cost somewhere between what each component currently costs for suppliers (cost of revenue + opex for appropriate business segment divided by total units) and the price AAPL currently pays for each respective component; we think the company can achieve ~$0.20-0.25/sh of annual EPS savings in this scenario (~3% of consensus CY25 EPS) or $0.10-0.25 of EPS benefit for just Modem/Bluetooth+Wi-Fi insourcing. (emphasis his)

Historically, Apple has demonstrated a strong track record of bringing chip design in- house which has benefited both product functionality and gross margin. Internally developed silicon solutions for AAPL include the A-series processor used in iPhones/iPads, the processor used in the Watch, and more recently, the M-series CPUs in MacBooks. We would not be surprised if this trend toward insourcing continued to drive gross margin tailwinds over time.

Net/Net: Sticking with OP rating and $190 target.

My take: At 8 pages, not the deepest dive Daryanani has ever delivered. Some interesting graphics, though. Take Figure 5, for example (click to enlarge)…

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