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Investment Overview for Apple (NASDAQ:AAPL)
Below are key drivers of Apple's value that present opportunities for upside or downside to the current Trefis price estimate for Apple:
- iPhone market share: Apple's iPhone market share has increased at a fast rate from around 0.3% in 2007 to 8.5% in 2013, as per our estimates. Going forward, we expect it to continue to increase steadily to around 11% by the end of Trefis forecast period. The iPhone’s unique touch screen interface, and the intuitive and user friendly features are some of the factors behind its success. The company recently launched two new iPhone models – the iPhone 6 and iPhone 6 Plus, which will effectively fill a void in the company's product portfolio and allow the company to compete in the rapidly growing phablet or large-screen smartphone market. If Apple increases its iPhone market share to about 15% by the end of the forecast period, this could increase our price estimate for the stock by about 15%. On the other hand, if the company's market share comes in at around 9% by the end of the Trefis forecast period, this could reduce our price estimate for the stock by around 10%.
- iPhone gross margins: Apple's iPhone gross margins have declined in the past from 62% in 2007 to around 51% in 2010. However, Apple managed to improve its margins in 2011 to 55%, as per our estimates. Fierce competition with Android-based smartphones from Samsung, Motorola and HTC, as well as RIM, Nokia, etc, may have led to a discounting of older iPhones but component costs moved sharply in its favor to help Apple stem the decline in 2011. However, iPhone's margins seem to have resumed their declining trend by falling to 53% and 47% respectively in 2012 and 2013. We expect margins to continue to decline to around 32% by the end of Trefis forecast period. In case iPhone margins decline more rapidly to around 25% by the end of Trefis forecast period, there could be a downside of around 10% to our estimate for Apple stock. On the other hand, if iPhone margins decline to around 45% over the Trefis forecast period, there could be an upside of over 10% to our price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Apple at the top of the page.
Apple makes money primarily by selling mobile phones, computers, and tablets to consumers worldwide. Apple's well known consumer products include the iPhone, Macintosh ("Mac") computers, iPad and the iPod media player. In addition to selling hardware, Apple makes money by brokering the sale of music, films, TV shows, games, and iPhone software applications through its iTunes platform. Apple also recently launched its first wearable computing device, called the Apple Watch.
We believe the iPhone segment is more valuable than the Macintosh and iPad segments for two primary reasons:
Large mobile phone market
We estimate that about 1.8 billion mobile phones were sold worldwide in 2013 compared to about 316 million PCs and 195 million tablets. Although Apple's iPhone market share remains quite small, the underlying market opportunity over the forecast period could be much larger.
High iPhone profit margins
We estimate Apple's iPhone gross margins were about 47% in 2013 compared to around 27% for Macintosh.
Apple's Entry Into The Large Screen Smartphone Space
Large screen sizes have been a key driver of smartphone sales of late, as users increasingly choose to consume media and use their phones for more productivity-focused applications. The phablet market is expected to be the fastest-growing segment of the smartphone market, with IDC forecasting phablet shipments to grow at a CAGR of around 60% between 2014 and 2018. Apple finally launched two large-screen versions of its iPhone – the iPhone 6 and iPhone 6 Plus, which will sport screen sizes of 4.7 inches and 5.5 inches respectively, effectively filling up the void in its smartphone lineup. Accordingly, we believe that the company could see a stronger upgrade cycle given the possibility of pent-up demand from consumers who were holding off from buying new phones in anticipation of larger iPhones.
Increasing Competition and Saturation in High-end of Smartphone market
In June 2007, when Apple entered the then nascent smartphone market with the iPhone, Nokia and RIM were the only players in this segment. iPhone's success led to the entry of other players in the market, that has seen a huge spurt in demand in the recent years. Today, consumers have a huge array of smartphones to choose from, including but not limited to the Apple iPhone, BlackBerry, Android smartphones from Samsung, LG, and low cost manufacturers like Lenovo and Xiaomi. While the smartphone market is expected to see double-digit growth in the near term, much of the sales are likely to come from low and mid-priced handsets in emerging markets, while the the high-end of the market - which Apple caters to - is likely to become increasingly saturated.
Slowing iPad Shipments
While global tablet shipments continue to expand, the growth rate has been declining. As of Q1 CY2014, tablet shipments grew by just about 3.9% and IDC forecasts that tablet shipments for the year will rise by just about 12.1% , compared to a growth rate of around 51.8% during 2013. Additionally much of the growth in the tablet market is likely to come from low end tablets, given the saturating tablet market in developed countries. Given that the iPad caters to the high-end of the market, Apple has been seeing its tablet market share decline through the first half of CY2014.
Growth In Enterprise Market
In July 2014, Apple signed a deal with IBM that will see the two companies working together to further their enterprise mobility initiatives by bringing IBM’s cloud computing, big data and analytics capabilities to the iPhone and iPad. With the partnership, IBM will develop industry-specific apps and solutions for iOS devices, optimize its cloud services for the iOS platform and help with marketing Apple devices to enterprises. While Apple has been successfully increasing its presence in the enterprise space, the deal with IBM will give the company a more well-targeted push. IBM brings to the table decades of experience in understanding the needs of business customers and also has a sizable sales force needed to cater to large corporations.
Mac Market Share Growth
As of Q2 2014, Apple noted that its Mac line of computers had gained global market share for 32 out of the last 33 quarters. The company could continue to see growth, considering that it holds just about 5% share of the global PC market and has significantly better product differentiation given its proprietary Mac OS software and applications, sleek design and premium build-quality. Apple also benefits from the fact that it plays in the high end of the PC market – typically focusing on the lucrative $1,000+ price points – rather than the commoditized low and mid-range where a bulk of the volumes come from.
Increasing Wi-Fi and Mobile Broadband Availability
The increasing availability of mobile high-speed Internet access creates opportunities for smartphones to move beyond e-mail and basic Internet surfing to new competitive fields. The availability of mobile TV shows, films, games, photo sharing, software applications, and video conferencing are potential points of differentiation among smartphone competitors.
Supply Chain Management A Major Risk For Apple
Companies like Apple are more concerned about component supply related issues rather than demand issues. The 2011 earthquake in Japan created quite a few headaches for Apple with regards to component supplies, as many Apple suppliers are Japanese firms. A recurrence of similar supply chain issues, not only in terms of natural disasters but also price fluctuations, poses a major risk to Apple in the future.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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