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Update to initial post since Credit Suisse’s original report had an incorrect table.

Credit Suisse updated Exhibit 2 in its note to show how Apple could increase its buyback substantially by taking on an additional $70 billion in long-term debt by September 2016. While the numbers make more sense in December 2013 Moody’s put out a report that it believed that the company could only take on an additional $20 to $25 billion in additional debt without affecting its credit rating. Moody’s estimate is over a year old so it may be possible that the number would be greater and Apple may be willing to live with a slightly lower credit rating but it may be a stretch to get to Credit Suisse’s forecast of a $200 billion capital return program without a tax holiday on overseas cash.

Corrected table

Original post:

Credit Suisse’s Apple Apple analyst Kulbinder Garcha upgraded Apple from Neutral to Buy and increased his target price from $110 to $130. The upgrade is being driven by iPhone volumes growing to over 215 million in fiscal 2015 and 2016, that his overall estimates could still be conservative and with $50 billion per year in free cash flow that the company could increase its capital return program to over $200 billion by December 2017 (from $130 billion by December 2015) but see my concerns below that he is being too aggressive in his buyback assumptions. (Note that I own Apple shares).

Projecting 71 million iPhones were sold in the December quarter

Garcha has one of the highest published estimates for the number of iPhones that Apple sold in the December quarter (I have been at 70 million since the end of November and would not be surprised to see it come in a bit higher) and his Average Selling Price (ASP) forecast is $687 which means iPhones would generate almost $49 billion in revenue.

He is estimating that Apple could sell 215 million iPhones in fiscal 2015 and 2016 with ASPs of $647, which would generate $139 billion in revenue both years. The positive is that this would be a 36% increase in iPhone revenue in fiscal 2015 but it would be flat in fiscal 2016. This deceleration in revenue growth will be a major test for the stock price as a large number of investors will be concerned about the slowing rate and what it could mean for other metrics, especially gross margins.

Three upside levers

Garcha believes that he could be conservative over the short and medium timeframes. First is his assumption of gross margins at 39.7% in fiscal 2015 and 39.0% in fiscal 2016 since he is not incorporating any leverage from increased sales as well as cost curves on new products as manufacturers become more efficient producing them.

Second is his 20 million unit assumption for Apple Watches with an ASP of $400 in calendar 2015 with a gross margin of 50%. Third is not adding any significant impact from new products such as a larger iPad, lower end iPhone or Apple TV or monetization of new services such as Apple Pay, Beats, HealthKit or HomeKit.

Buybacks seem to ignore overseas cash limitations