Ride Apple To $600 Now

by Trefis Team
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Apple’s (NASDAQ: AAPL) stock is up from levels of around $110 at the end of FY’16 to about $300 currently, driven by the growth of its services business and share repurchases. In this analysis, we outline a case that could see Apple stock grow 2x to levels of above $600 by FY’25. In addition, you can view our base case forecast for Apple’s Revenues and Apple’s Valuation

Our interactive dashboard analysis, ‘How Apple Stock Could Cross $600′captures the key requirements for Apple’s stock doubling in value in 5 years. We highlight parts of the detailed dashboard below.

Purpose of this analysis: To shine the spotlight on the unexpected but possible – the outlier situations. Share underlying data + assumptions. To help you be more prepared.

This is what it will take for Apple stock to cross $600:

To grow to over $600, we estimate that:

  • Apple will need to post $430 billion in annual revenues, up from $260 billion in 2019. Possible via the launch of 5G iPhone and services growth with App Store, streaming video and iCloud expansion to enterprise space.
  • Net margins will need to expand to 24.5% from about 21% in 2019, driven by a higher mix of services revenue.
  • Share count to reduce from 4.6 billion to about 4 billion.
  • P/E multiple would need to stand at 22.5x, compared to 19x at the end of FY’19 and 23x as of February 2020.

#1. iPhone Revenues: $210 billion from iPhones by 2025; up from $142 billion in 2019; and about 25% higher than $167 billion during 2018 iPhone X replacement cycle.

#1.1 How could iPhone Revenue Growth speed up?

5G-triggered replacement cycle of >900 million iPhones + new buyers

  • Apple is likely to launch new iPhones with 5G connectivity later this year. Moreover, iPhone design could see their first meaningful change since 2017’s iPhone X
  • This could set off an upgrade cycle, as Apple has a base of over 900 million active iPhone users who have been holding their devices for increasingly longer periods. For example, as of 2019, the average replacement cycle for U.S. smartphone users stood at 33 months, up from 24 months a few years ago.
  • Apple typically sees strong demand when it launches a completely redesigned handset. In the past, iPhone revenues have seen sharp growth after a significant design change such as the iPhone 6 and iPhone X (see charts below).

To see how iPhone Revenue Growth accelerates when Apple launches a meaningfully redesigned model, view our interactive dashboard analysis How Apple Stock Could Cross $600

#2. Services Revenues: Services Revenues need to grow to over $120 billion from below $50 billion in 2019, driven by new 5G-enabled apps, streaming, extending iCloud to Enterprise and ApplePay

  • Possible avenues for Services growth include Appstore (newer 5G-enabled apps), expansion in streaming/monetization of Apple TV+, iCloud’s entry into enterprise cloud (competing with Amazon, Google, and Microsoft) and the expansion of ApplePay and financial services offerings.
  • Assuming that active iPhones (used as a proxy for users of Apple’s services business) grow from 900 million in 2019 to about 1.25 billion by 2025, with Services ARPU rising to $100/ year, it would translate into a revenue of $125 billion.
  • Apple’s Services ARPUs are currently about half of Facebook and Netflix, giving the company sizable room to scale up.

#3. Total Revenues: Apple Total Revenues to grow to about $430 billion by 2025, up from about $280 billion in 2020.

#4. Apple EPS, Margins and Shares Outstanding: Apple’s EPS would need to more than double from $12 in FY’19 to $27 in FY’25, driven by higher margins and share repurchases.

  • Apple’s Net Income Margin will need to expand to over 24% from around 21% currently, driven by a higher mix of services revenues and more proprietary components in its devices.
  • Apple’s shares outstanding will also need to decline by 15% to below 4 billion, driven by repurchases. Shares outstanding will reduce at a slower pace compared to the last 4 years, given Apple’s higher share price.

#4.1 Margins could trend higher due to a higher mix of Services, which have higher gross margins

  • Apple’s Services gross margins stood at 64% in Q4’19, roughly double its products gross margins.
  • As the upside case assumes that Apple’s Services business will account for 30% of total revenue, up from 18% in FY’19, this will have a positive impact on gross margins.
  • Separately, Apple has also been using more proprietary components in its devices, and this could help it cut costs and improve pricing power further, helping margins.

#5. Apple Valuation: Assuming a P/E multiple of 22.5x, Apple stock could be valued at about $605 by 2025

  • Apple stock could be valued at over $625 per share if EPS for 2025 cross $28 and the company trades at an earnings multiple of 22.5x.

Why P/E multiple of 22.5x in 2025?

  • While the P/E number the market will assign is based on the alternatives available to investors – here is some data we used to arrive at a potential multiple for Apple. We suggest that you choose for yourselves:
  • #5.1 The S&P 500 trades at about 20x with Revenue Growth of under 20% and margins of about 10%
  • #5.2 Google trades at about 24x, with revenue growth of about 20%-23%, and margins of a little over 20%

See all Trefis Price Estimates and Download Trefis Data here

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