This will be a very interesting week on the stock market, not least the US mid-terms and the ongoing US/China trade saga, which will likely determine the short-term direction of the market. Apple (AAPL) reported last week and another stellar report was hoped for to calm technology weakness. Instead of a stellar report the market got weak Q1 guidance and the news that AAPL would drop detailed product reporting for their FY2019. Given that there is a massive industry dedicated to examining iPhone trends, the lack of specific numbers being disclosed has caused consternation amongst commentators.
It has been about a year since I last posted on AAPL (here) when it traded around $170. Of course, it has since traded up to a high of $230 before falling back to just above $200 currently. There is no doubt that the smartphone market is saturated with IDC estimating global smartphone shipments falling in Q3 by 6% to 355 million unit. In this environment, it makes sense to me for AAPL to focus on higher value smartphones and to extracting increased fees from services on their installed base. Extrapolating on the iPhone installed base analysis from my last post, I estimate that the iPhone installed base will peak around 650 units based upon iPhone unit sales fall to 200 million and 190 million in FY2019 and FY2020 respectively from 218/217 million in FY2018/2017. The active installed base, excluding non-core users, peaks around 570 million. My projections are shown below.
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I have also assumed that the ASP for FY2019 and FY2020 increases to $819 and $847 respectively from $759 in FY2018. I further assumed that service revenue increases as a percentage of total revenue to 18% for FY2020 from 14% in FY2018. I suspect this may be too light given AAPL’s decision to move its reporting focus away from products to services. Although AAPL’s net cash pile is slowly dwindling (approx. $120 billion at end September from $170 billion at the end of December 2017), I think a more focused move by AAPL into the home and content to take on Netflix and Amazon will be a feature of the next few years (bring on the NFLX rumours, again!). My resulting quarterly revenue estimates into FY2020 are shown below.
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As you can see, these estimates do show overall revenue moderating with revenue for FY2019 and FY2020 at $270 billion and $273 billion respectively from $266 billion in FY2018. My diluted EPS estimates, assuming the same trend of share buy-backs, for FY2019 and FY2020 are $13.30 and $14.80, representing EPS growth of 12% and 11% respectively. These EPS estimates are consistent with current consensus. At a share price of $200, the forward PE would be 15 and 13.5 for FY2019 and FY2020 respectively.
My usual forward PE excluding cash graph, at an AAPL stock price of $200, is below. If AAPL were to return to its historical average multiple since 2009 of 9, then AAPL’s stock could fall back to $160 or below if the market gets really spooked about peak iPhone.
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The question therefore is how the market is going to react to AAPL’s attempt to move the focus from its hardware results and more towards its service business from its massive and loyal installed base. Changing the market’s obsession from iPhone sales will be no easy task. AAPL is an emotive stock, not only because of its products but for its incredible historical value creation. It is the one stock that I have always regretted selling any of. I do not think now is the time to sell AAPL but I will wait for the stock price to settle, particularly in the current volatility, to consider buying more. A fall towards $170 would be too tempting to ignore for this wonderful firm. Mr Buffet and the firm’s own buy-back programme make such a fall unlikely in my view but one can only hope!
Posted in Equity Market, Investing Ideas
Tagged 2019 AAPL price target, AAPL, AAPL 2019 estimates, AAPL 2019 projections, AAPL 2020 estimates, AAPL 2020 projections, AAPL ASP 2018, AAPL multiple, AAPL overvalued, AAPL service revenues, AAPL undervalued, AAPL valuation, Amazon, Apple, average selling price, iPhone 8, iPhone 8 unit sales, iPhone installed base, iPhone installed base 2019, iPhone super-cycle, iPhone unit sales, iPhone X, iPhone X unit sales, iPhone XR, iPhone XS, iPhones upgrades, NFLX, peak iPhone, R&D spend, secondary iPhone users, segmenting iPhone, smartphone market, smartphone saturation
One lesson from the internet bubble is that big is beautiful in tech. But longevity is another lesson, think Yahoo! So one must be fickle in ones tech affections and one must never ever pay too much. After much patience, I was lucky enough to eventually get into Apple in early 2013 when sentiment was particularly sore. I didn’t manage to heed my own advice on getting into Google at a reasonable price in December 2014 when it was trading around 60% of its current value, as per this post on internet relative valuations (more on that post later). Since 2013, I have watched sentiment gyrate on AAPL as the standard graph I use below illustrates (most recent AAPL posts are here and here). I used the current $135 price high as the most recent data point for the Q12017 valuation.
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Investors and analysts seem giddy these days about the impact of Trump tax changes and the iPhone 10 year anniversary on AAPL and have been pointing to Berkshire’s position increase in AAPL as confirmation bias of more upside. I, on the other hand, have been taking some of AAPL off the table recently on valuation concerns and will likely again be a buyer when the inevitable worries return along the “one trick iPhone pony” lines. God bless gyrating sentiment! Even Lex in the FT was saying today that the current TTM PE ex net cash of 13 is reasonable (eh, a TTM PE ex net cash of 7 a year ago was more reasonable)! AAPL still has be a core holding in anybody’s portfolio but prudent risk management requires trimming at this price in my opinion.
In my search for new ideas whilst I await some divine sense to emerge from the Trump & Brexit fog, I thought it would be interesting to revisit the post referred above on internet valuations. First off, I took the graph showing forward PEs to projected EPS growth using analyst estimates from December 2014 and inserted the actual change in share price from then to now. Two notable exceptions, at the extremities, from the graph below are Amazon and Twitter with share price changes of 173% and -56% respectively.
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Although every company is different and has its own dynamics, my simplistic take from the graph below is that high PE stocks (e.g. > 40) with high EPS projections (e.g. > 35%) can easily run aground if the initial high growth phase hits harsh reality. The sweet spot is decent PEs with EPS growth in the 15% to 35% range (again assuming one can get comfortable that the EPS growth projections are real) indicative of the larger established firms still on the growth track (but who have successfully navigated the initial growth phase) .
A similar screen based upon today’s values and analyst estimates out to 2018 is presented below. This screen is not directly comparable with the December 2014 one as it goes out two years rather than one.
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Based upon this graph, Google and Netease again look worthy of investigation with similar profiles to two years ago. Netease has the attraction of a strong growth track record with the obvious Chinese political risk to get over. Expedia looks intriguing given the strong growth projected off a depressed 2016 EPS figure. Ebay and Priceline may also be worth a look purely on valuation although I have a general aversion to retail type stocks so I doubt I’ll bother look too deeply. All of the data used for these graphs is based upon analyst estimates which also need to be validated.
Valuations currently are juicy, generally too juicy for me, so this exercise is simply one to determine who to investigate further for inclusion on a watch-list. Time permitting!
Posted in Equity Market
Tagged AAPL, AAPL guidance, AAPL tax bill, AAPL valuation, Alibaba, Alphabet, Apple below $100, Baidu, bubble valuations, China iPhone sales, Chinese internet stocks, Ctrip, diluted GAAP EPS, Earnings guidance, EPS multiples, expedia, Facebook, forward PE, forward PE Google, forward PE ratio, future demand iPhone, geographic revenue split, Google valuation, internet bubble, internet valuations, iPhone average price, iPhone gross margin, iPhones sold, linkedin, NetEase, overvalued AAPL, PE ratio, sentiment on Appl, SINA, SOHU, tech target price, technology stocks, Tencent, undervalued AAPL, undervalued Apple