Apple: Path To $1 Trillion Market Cap Not Easy

Apple’s (NASDAQ:AAPL) stock has rallied over the last two months, driven by strong uptake of the iPhone 7, better than expected results over the holiday quarter and buzz surrounding new products such as Airpods and the second-generation Apple Watch. Apple’s market cap is up from levels of around $600 billion in early January to roughly $740 billion currently. This means that the company’s stock would need to rise by just about 35% for Apple to become the first company to attain a $1 trillion market cap. While there could be multiple potential paths to a trillion dollar valuation, below we take a look the possibility of Apple’s flagship product – the iPhone – helping the company hit the milestone.

We have a $133 price estimate for Apple, which translates to a market cap of about $700 billion. Our price estimate is slightly below the current market price.

The iPhone Franchise Will Play An Instrumental Role

There has been a lot of speculation as to where Apple’s next wave of growth is likely to come from – with rumored product lines including electric cars and streaming TV services. However, we don’t see another product or market that has the ability to move the needle for Apple the way that the iPhone does, given that the smartphone accounts for roughly 55% of Apple’s market cap and about 70% of its enterprise value, per our estimates. Moreover, Apple is proving that its iPhone user base is sticky as it continues to invest in the ecosystem, increasing switching costs for the platform.

While we don’t have visibility into iPhone refreshes in the long term, the near-term pipeline appears to be exciting, with Apple reportedly prepping to launch multiple iPhones this year, with a flagship 10th anniversary device that could sport a complete design overhaul. Apple’s stock tends to shoot up during years when the company redesigns the iPhone, on account of the pent-up demand for a fresh-looking handset. For instance, Apple stock gained close to 30% at its peak during the iPhone 6 product cycle.  There is a possibility that year’s upgrade cycle could turn out to be more pronounced, given that Apple hasn’t refreshed the iPhone’s design in three years.

What It Will Take For The iPhone To Drive A $1 Trillion Market Cap

Our $133 price estimate for Apple estimates that iPhone shipments will grow from levels of around 225 million this year (11.7% share of mobile phone market) to about 245 million by 2023 (11.5% share). We estimate that average selling prices (ASPs) will rise to about $685 in 2017 from levels of about $670 in 2016, as the anniversary iPhone is expected to be priced higher than the most expensive 7 Plus models. However, we expect ASPs to decline to about $625 by the end of our forecast period amid intense competition in the smartphone market, with margins also trending lower from levels of around 44% to about 34%.

In order for the iPhone to boost Apple’s market cap to $1 trillion, Apple would need to boost iPhone ASPs to around $720 in 2017, and maintain it at these levels through 2023. Moreover, the company would have to improve and maintain iPhone gross margins to around 47%. Apple would also have to improve its market share to about 14% by the end of our forecast period (2023), translating into shipments of roughly 290 million (try other scenarios using our interactive Apple model).

The above scenario might seem relatively unlikely, given the mounting competition – particularity from the likes of Google – and other risks such as elongating handset upgrade cycles in developed markets. Nevertheless, the stock markets are often momentum-driven, and if Apple launches truly innovative handsets, rather than incremental upgrades, there could be a possibility of a significant rally in its stock price.

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