How Offering A Cheaper iPhone Variant Could Help Apple’s Stock Gain 20%

by Trefis Team
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Apple (NASDAQ:AAPL) shares are currently trading around an all-time high figure of $180. We believe that the current stock price represents the fair value for Apple’s shares. However, the tech giant could potentially unlock a sizable amount of value for investors by introducing a cheaper version of the iPhone to target other segments of the rapidly growing smartphone market. Under such a scenario, we estimate the company’s value could be closer to $215 per share – representing an upside of 20%.

We arrive at these price estimates using our interactive model for Apple, which is based on just 7 core metrics for the company:

  • Number of iPhones sold: Apple makes a bulk of its revenues and profits from its sale of iPhones. Additionally, Apple’s business model relies on its closed ecosystem – in turn driven primarily by the success of the iPhone. This makes the number of iPhones sold the pivotal metric for valuing the company
  • Revenue per iPhone: This represents the average revenues generated by Apple for a fiscal year (ending September 30) per iPhone sold

  • Average iPhone Replacement Cycle: We use this metric to estimate the total number of iPhone users at the end of any given year. We assume a replacement cycle of 2.5 years, which implies that an average iPhone user replaces his/her phone every 2.5 years.
  • Apple’s iPhone-Driven Revenues per User: iPhone users drive a bulk of Apple’s Services revenue, and are also responsible for a large portion of the company’s revenues from products like iWatches and HomePods, which are all part of Apple’s closed ecosystem. This metric captures all these revenue streams that are directly linked to the number of iPhone users.

  • All Other Apple Revenues: This metric captures all of Apple’s revenue streams that are independent of the iPhone. This includes proceeds from the sale of iPads and Macs, as well as a small part of Apple’s services revenue driven by these products.

  • Income Margin: This metric encompasses the profitability of Apple’s overall operations and the impact of changes in effective tax rate.

  • P/E Ratio for the company: We assume a P/E ratio of 15.5 for Apple. While this figure is relatively high for a tech company, we believe it captures the high growth potential offered by the technological innovator.

The estimated EPS of $11.60 for fiscal 2018 translates into a price estimate of $180 for Apple. Our alternative scenario estimates the value of the following inputs if Apple chose to introduce a much cheaper variant of the iPhone to target more of the smartphone market:

  • Number of iPhones sold: Apple’s exclusive focus on the high-end smartphone market may have helped it maintain high profit margins over the years, but a strategy to capture more of other segments can help Apple compete better with Samsung. More importantly, the more iPhones Apple manages to get into users’ hands, the more revenues it can generate through its closed ecosystem – a benefit none of its rivals have. We estimate that the introduction of a meaningfully cheaper iPhone variant could boost iPhone sales to 300 million a year (up from 232 million under the base case scenario)
  • Sales Revenue per iPhone: The cheaper iPhone would understandably have a negative impact on average sale price, which we expect will be $630 (instead of $765 for the base case)
  • iPhone-Driven Revenues per user: As we detailed above, more iPhone users will translate into much higher revenues for Apple’s other products and accessories, and should boost Apple Services revenues in particular. Because of this, we expect Other Revenues per iPhone user to increase to $80 (up from $67 under the base case).
  • Income Margin: While cheaper iPhones will have a negative impact on Apple’s margins, we believe that this decline will be more than made up for by revenue gains from Apple Services, which is a high-margin revenue stream, as well as from the sale of other hardware and accessories (like the recently launched HomePod), which have margins in excess of 30%. Accordingly, we expect the overall margin to improve to 23% (from 21.6% under the base case scenario).
  • P/E Ratio for the company: The faster growth potential warrants a slightly higher P/E ratio of 16 for Apple under the alternative scenario compared to the figure of 15.5 under the base case.

Note: Apple reports its results over a 12-month period ending September 30 of each year. The historical figures and estimates above correspond to company-reported fiscal periods.

Don’t Agree With Our Forecast? Feel Free To Create Your Own By Making Changes To Our Model

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