Tag Archives: iPhone X

Peak iPhone

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!

An Apple Appetite

Recently I have been trying to dig deeper into Apple (AAPL) to get a handle on what the near term may mean for this amazing company and thereby get an insight into APPL’s valuation. I have struggled with AAPL’s valuation in previous posts (here and here) but after each of my musings the share price continued on its upward trajectory.

Irrespective of whether iPhone 8 and iPhone X unit sales disappoint (due to unit shortages or otherwise) over the coming months, it seems highly probable to me that Apple will be successful in segmenting their iPhone market further over the medium term and break through the $1000 per iPhone spend in a significant way. Their R&D spend of over $10 billion (including nearly $2 billion of share options) goes a long way to ensuring customers will pay for their innovations.

The reason why AAPL are following the current strategy is a hot topic of debate with analysts. Some see the new iPhone models feed into a super-cycle of updates and continued installed base growth, pointing to the approximate 40% of the current iPhone installed base older than 2 years. Other analysts believe that the smartphone market has plateaued (see graph from Mary Meeker below) and Apple is embarking upon a segmentation strategy to harvest their loyal customer base.

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The estimates for the iPhone installed base vary significantly across analysts from 550 to 750 million units and some, such as Deutsche Bank and BoA ML further, break the base down to core and secondary non-core users. Although most of the estimates are likely out of date as they were published prior to the iPhone 8 and iPhone X announcements, the graphic below illustrates the differing views.

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It is likely no surprise that I am in the plateau camp on future growth of the installed base. I have assumed an installed base of 640 million as at end September 2017 and 40% or approximately 250 million of these are potential iPhones upgraders with phones older than 2 years. I have further assumed that a proportion of the installed base, I selected 10%, are secondary non-core users with a very low propensity to upgrade. That leaves an approximate 190 million potential upgrades for the FY2018. Despite the lack of growth of the market, I assumed another 10 million sales from new purchasers giving a target iPhone unit sales of 200 million for FY2018. 200 million of annual unit iPhone sales is well below most analyst estimates which average around 240 -260 million for FY2018.

Of the 200 million iPhone unit sales for FY2018, I have further assumed 45 million are iPhone X and just over half are iPhone 8, with the remainder being iPhone 7 and older models. For Q42017, I am assuming only 9 million iPhone 8 sales with 35 million of iPhone 7 and older models (influenced by the amount of inventory clearance sales I have seen in retail stores). The graph below shows my installed base assumptions, with my estimates for sales of the iPhone 8, iPhone X and it successor models over FY 2018 and FY2019 (I am assuming 200 million units is the new normal for annual iPhone sales through to FY2020).

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The resulting average selling price (ASP) for FY2018 is $785 with annual FY2018 revenues from iPhone of $157 billion. For FY2019, I have assumed a ASP of $860 with annual FY2019 iPhone revenues of $172 billion. The graph below shows my revenue assumptions over FY 2018 and FY2019 across all products.

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The EPS estimates coming out of my model, using the assumptions above (amongst others), for FY2018, FY2019 and FY2020 are $10.17, $11.45 and $11.81 respectively (I agree with the estimates of $9.00 for FY2017). That represents 13% EPS growth for 2018 and 2019, slowing to 3% in 2020. At the current share price of $160, the forward PE (excluding cash) would look as per the graph below.

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My analysis suggests that AAPL either deserves a higher multiple than the recent past to justify its current value or it will have to convince enough new iPhone users to buy its new products to take market share from its competitors and sell more than 200 million iPhone annually for the foreseeable future.

Given the potential headwinds for iPhone 8 and iPhone X over the short term, the current price may be difficult to defend near term as the market gets used to lower iPhone sales at higher prices (and hopefully margins too). Then again, going negative on AAPL hasn’t proven fruitful in the past and the analysts are currently hyping up AAPL’s prospects with price targets heading solidly towards $200.

Given my previous history of questioning AAPL’s valuation, maybe indecision is the best answer for the time being……