VALUATION HIGHLIGHTS

1. iPhone constitutes 43% 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 14% of the Trefis price estimate for Apple's stock.

WHAT HAS CHANGED?

Apple's Q4 FY'21 revenues miss estimates on semiconductor shortage

Apple published a relatively mixed set of Q4 FY'21 results. While EPS for the quarter came in at about $1.24, roughly in line with estimates, revenues fell short of expectations coming in at $83.36 billion, up about 29% year-over-year. Although key product categories including the iPhone and iPad saw strong growth, with revenue rising 47% and 21% respectively year-over-year, Apple has been facing meaningful headwinds on account of the global semiconductor shortage and Covid-19 related manufacturing issues. Apple has also indicated that it expects the impact from supply constraints in the holiday quarter to be larger than it was in the September quarter.

Launch of the iPhone 13

Apple unveiled its new iPhone 13 models in mid-September 2021 - including the iPhone 13, iPhone 13 Mini, iPhone 13 Pro, and iPhone 13 Pro Max. The new devices represent an incremental upgrade over last year’s models, with new processors, much-improved cameras, and some display changes in high-end models. 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.

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 slightly from $ 192 billion in FY'21 to around $220 billion by FY'28. However, if the company is able to improve its iPhone revenues to levels of around $250 billion by the end of our review period, with gross margins rising to about 43% from our current forecast of 41.6%, there could be an upside of about 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.

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

Services Present A Growth Opportunity

Apple's Services business has grown at a rate of over 23% between FY'16 and FY'21, eclipsing the iPad and Mac to become the company’s second-largest business segment with revenues of about $68 billion in FY'21. While the App store remains the primary driver of growth, services such as Apple Music and Apple TV+ are also gaining traction. Apple's base of paid subscriptions on its platform has also been rising steadily, with about 745 million active subscriptions at the end of September 2021.

iPad Shipments Gaining Traction on New Launches

While global tablet shipments remained sluggish through 2019, they have picked up nicely over the last year or so as Covid-19 and the remote working and learning trend drove sales. iPad sales jumped by over 30% in FY'21. Apple is adopting a two-pronged strategy of focusing on both value-priced tablets for casual users starting at around $330 while catering to professionals with its higher-powered iPad Pro devices which can cost upwards of $1,000.

Mac Gains Traction

Apple's Mac computers have been gaining market share, due to their superior product differentiation, proprietary Mac OS software and applications, new M1 processors, and premium build quality. Apple has also been benefiting 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'21, Mac Revenues reached an all-time high of $35 billion, as demand for computers soared with people working and learning remotely due to Covid-19.