VALUATION HIGHLIGHTS

1. iPhone constitutes 42% of the Trefis price estimate for Apple's stock.
2. Services constitute 25% of the Trefis price estimate for Apple's stock.
3. Apple Watch,TV&Accessories constitute 15% of the Trefis price estimate for Apple's stock.

WHAT HAS CHANGED?

Apple's Strong Q3 FY'2021 Results

Apple posted strong Q3 FY'21 results, with revenue surging almost 36% year-over-year to $81.4 billion and EPS growing to $1.30, from around $0.65 last year. The growth was driven by robust sales of Apple's new flagship iPhone 12 devices (iPhone sales were up 50% year-over-year), higher services revenues, and strong Mac and iPad sales. Apple's gross margins also surged to a little over 43%, up from 38% last year, driven by a more favorable mix of iPhone sales and higher services revenues. That said, the momentum could slow slightly in the coming quarters, as Apple expects the industrywide semiconductor shortage to impact the production of its iPhone and iPad devices.

Launch of the iPhone 12

Apple unveiled its new iPhone 12 models in mid-October 2020 - including the iPhone 12, iPhone 12 Mini, iPhone 12 Pro, and iPhone 12 Pro Max. The new devices represent a nice upgrade from last year’s models, with 5G wireless technology, new processors, improved cameras, a slightly refreshed design, and new screen size options. While Apple has indicated the early demand for the devices has been strong, it's likely that wireless carriers – who’ve spent considerable amounts on 5G network upgrades – will be aggressive with promotions on the new devices as they look to sign up new customers and boost revenues.

Transition from Intel chips on the Mac

Apple has started shifting its Macs from Intel chips to its custom ARM-based processors. In November, the company launched updated versions of its Macbook Air, Macbook Pro 13, and Mac Mini that run on its custom M1 processors. A complete transition is planned by 2022. By designing its own processors, Apple will control the Mac experience from end to end, allowing it to optimize performance, design, and battery life. There is likely to be an attractive financial incentive as well, considering that processors are very high-margin components.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Apple's value that present opportunities for upside or downside to the current Trefis price estimate for Apple:

iPhone revenues And margins post improvements

• iPhone Revenue and Gross Margin:
  We estimate that Apple's iPhone revenues will improve from $ 138 billion in FY'20 to around $172 billion by FY'26. However, if the company is able to improve its revenues to levels of around $190 billion by the end of our review period, with gross margins rising to about 40% from our current forecast of 38%, there could be an upside of about 15% 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.

BUSINESS SUMMARY

Apple makes money primarily by selling mobile phones, computers, and tablets to consumers worldwide. Apple's well-known consumer products include the iPhone, Mac, iPad, and Apple Watch. In addition to selling hardware, Apple makes money from services that include the App Store, Apple Music, and iCloud. Our valuation model is based on Apple's fiscal year, which ends on September 30.

SOURCES OF VALUE

We believe the iPhone segment is more valuable than the Mac and iPad segments due to:

Large mobile phone market

The smartphone market is significantly larger than the tablet market and margins in the smartphone business are also likely to be higher. Globally, about 1.4 billion smartphones were shipped globally in 2019.

KEY TRENDS

Increasing Competition and Saturation in High-end of Smartphone market

In 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, which has seen a huge spurt in demand in recent years. Today, consumers have a huge array of smartphones to choose from, including premium Android smartphones from Samsung and Google and low-cost manufacturers such as Lenovo and Xiaomi. While the smartphone market could expand slightly, much of the sales are coming from low and mid-priced handsets in emerging markets, while the high-end of the market - which Apple caters to - is becoming increasingly saturated. Apple posted a year-over-year decline in iPhone sales during FY'16, FY'19, and FY'20. However, the company is expected to see double-digit growth in iPhone sales in FY'21, driven by the new iPhone 12.

Services Present A Growth Opportunity

Apple's Services business has grown at a rate of over 21% between FY'16 and FY'20, eclipsing the iPad and Mac to become the company’s second-largest business segment with revenues of about $54 billion in FY'20. While the App store remains the primary driver of growth, services such as Apple Music are also gaining traction. Apple's base of paid subscriptions on its platform has also been rising steadily, with about 585 million active subscriptions at the end of September 2020.

iPad Shipments Gaining Traction on New Launches

Global tablet shipments have been sluggish on account of longer upgrade cycles for tablets and cannibalization from large-screen smartphones. Apple has been impacted, with iPad shipments declining by about 4% in FY'17 and remaining almost flat in FY'18. However, things started to turn around in FY'19, driven by Apple's two-pronged strategy of focusing on both value-priced tablets for casual users while catering to professionals with its higher-powered iPad Pro devices, which are priced as high as $1,800.

Mac Gains Traction

While the global PC market has been shrinking, Apple has largely been able to buck the trend given its superior product differentiation, 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. Over FY'20, Mac Revenues reached an all-time high of almost $29 billion, as demand for computers soared with people working and learning remotely due to Covid-19.