UBS Steven Milunovich weighs in with favorable notes on tech giant Apple Inc. (NASDAQ: AAPL) and network equipment maker Cisco Systems, Inc. (NASDAQ:CSCO). The analyst remains bullish on Apple despite negative Japanese phone sales, believing sales should rebound in the next two years. Milunovich also has high hopes for Cicso after they implemented cultural changes to improve employee morale.
Milunovich provided his insights on AAPL in regards to its Japanese market. While investors usually focus more on China, the company’s second largest market following the U.S., he mentions some “troubling brew” in Japan which could negatively impact growth. In F2Q, the country represented Apple’s highest geo operating margin at 45%, however, the analyst notes that in F15, growth slowed to only 3%.
First, the analyst states that the Japanese government expressed concern that the percentage of disposable income spent on monthly phone charges, 4%, is too high, and called on major carriers to reduce mobile rates. Milunovich explains that carriers used to offer switching incentives by subsidizing handsets, instead charging a high monthly rate for subscribers. He states “These incentives [were] helpful to Apple since it charges a 15-20% premium relative to the US.” However, this order will negatively impact growth. The analyst explains, “Japanese carriers are no longer as aggressively using discounts on handsets to lure subscribers from other carriers, which could affect phone sales.”
Milunovich also comments on the recent emergence of MNVO’s (mobile virtual network operators) in Japan, which sell a sim card and offer lower rates to subscribers who use their own phones. These customers, over 5 million according to Milunovich, are likely to keep their own phones for a longer period of time, resulting in longer upgrade cycles and representing a “double whammy” when combined with handset share loss. The analyst explains further, “While the Apple brand remains strong, cheaper alternatives are making inroads with Apple’s share potentially declining over time from 50% to 30%.”
The analyst maintains a Buy rating on the stock with a $115 price target. He states, “We believe iPhone sales will stabilize in F17 and grow 15% in F18 on a strong upgrade cycle, justifying a higher multiple.”
According to TipRanks, out of all the analysts who have rated Apple in the past 3 months, 82% gave a Buy rating, 2% gave a Sell rating, and 16% remain on the sidelines. The average 12-month price target for the stock is $123.16, marking a 32% upside from where shares last closed.
Cisco Systems, Inc.
Milunovuch commented on Cisco’s recent corporate cultural change, highlighting several initiatives and how they will affect employee morale. The analyst states that in his firm’s Glassdoor analysis, results indicated that “Cisco scores particularly high on work-life balance but lower on career opportunities.”
Following employee suggestions, Cisco recenrtly implemented The People Deal, a cultural initiative focusing on communication, innovation and risk-taking, and shared success among employees. The analyst states, “We think soft factors like culture can matter since numbers are the lagged reflection of strategy and execution. Cisco’s culture affects execution.” Further initiatives to improve employee moral include a focus on accountability, guaranteed of fair pay, and more opportunities.
Despite management’s efforts to enhance employee morale with a goal of overall company improvement, the analyst cites investor worries regarding corporate changes. Specifically, the analyst mentions the loss of the MLPS team, a group of 4 executives responsible for some of the company’s most profitable products, over role disputes. The analyst states, “Investors appear concerned about the degree of management reshuffling and loss of the MPLS team.” However, he reassures investors that management’s new priority to “stabilize the core switching and routing segments” will aid in achieving its 5% revenue growth goal.
In order to “maintain innovation”, the company created around 20 Alpha teams each working on 2-3 year projects. Milunovich notes that 7 of those projects are “closer to market” including Tetration analytics, and should compensate for the loss of the MLPS team. The analyst also expects to receive updates on Alpha’s security and enterprise projects. Another effort to promote innovation includes an employee contest offering the winds $250,000.
The analyst maintains a Buy rating for the stock with a $32 price target. He states, “Cisco rates above competitors in surveys and deserves a premium, in our view.”
According to TipRanks’ statistics, out of all the analysts who have rated CSCO in the past 3 months, 65% gave a Buy rating, 4% gave a Sell rating, and 30% remain on the sidelines. The average 12-month price target for the stock is $31.05, marking a 12% upside from where shares last closed.