VALUATION HIGHLIGHTS

1. iPhone constitutes 42% of the Trefis price estimate for Apple's stock.
2. Services constitute 28% of the Trefis price estimate for Apple's stock.
3. Apple Watch,TV&Accessories constitute 13% of the Trefis price estimate for Apple's stock.

WHAT HAS CHANGED?

Apple's Q2 FY'22 earnings

Apple published a stronger than expected set of Q2 FY'22 results, with revenues coming in at $97.3 billion, up about 9% versus last year. EPS stood at $1.52, up from $1.40 last year. iPhone sales grew by about 5.5% to $50.6 billion, while services sales rose 17.3% to $19.8 billion. Although Apple hasn't provided guidance for Q3 FY'22, it has indicated that its performance in the near term could be weighed down by supply chain issues and Covid-19 related lockdowns in China.

Note: Apple's FY'21 ended on September 25, 2021. Q2 FY'22 refers to the quarter that ended on March 26, 2022.

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 in 2019, prior to the Covid-19 pandemic.

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.