Apple Inc (AAPL)

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WHAT HAS CHANGED?

Launch of New iPhone X and iPhone 8

In early September 2017, Apple launched a trio of new iPhones called iPhone 8 and 8 Plus – which are essentially upgraded versions of last year’s iPhone 7 – as well as an all new smartphone called the iPhone X, which features Apple’s first new industrial design in three years. While we expect both devices to sell very well, we do not believe that they will stoke an upgrade cycle on the scale of the iPhone 6, which helped Apple grow shipments by 37% during FY’15. The iPhone X - priced at about $1,000- may be out of reach for many potential customers, while the iPhone 8 could be viewed as being too similar to older iPhone models. That said, Apple appears to be focusing on protecting and maybe improving its gross margins, which have come under pressure over the last year or so.

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 Pricing Power And Margins Hold Steady

  • iPhone ASP and Gross Margin:
    We estimate that Apple's iPhone ASPs will decline from levels of around $760 in 2018 to about $725 in 2024, with margins also trending slightly lower. However, Apple has a strong history of disruptive innovation. If the company is able to launch truly revolutionary handsets rather than phones with incremental upgrades, it could improve its pricing power over the long run. If ASPs actually rise to about $820 with margins increasing by about 100 bps, there could be a 15% upside to our price estimate.

Android’s Progress In Premium Space Could Dent Valuation

  • iPhone ASP and iPhone Shipments:
    Android-based vendors are beginning to focus on improving design and aesthetics while adding unique features to handsets, while Google has been iteratively improving the overall software experience on Android (ex. Android Nougat). Vendors are also focusing on delivering high-end devices that command better pricing and cater to customers looking to upgrade in a saturating smartphone market. If this trend of Android vendors improving hardware, user experiences and design, backed up by Google’s solid software and services footprint, is able to put pressure on Apple's sales, keeping shipments essentially flat through our forecast period, while pushing ASPs down to levels of around $650 by 2024, this could reduce our price estimate for Apple by 15%.

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 the iPod media player. In addition to selling hardware, Apple makes money from services that include the App Store, Apple Music and iCloud. Apple introduced its first wearable computing device, called the Apple Watch in late 2014. 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 for two primary reasons:

Large mobile phone market

Gartner estimates that about 1.9 billion mobile phones were sold worldwide in 2015 compared to about 290 million PCs and 196 million ultra-mobile devices (Basic and Utility Tablets). Although Apple's iPhone market share remains quite small, the underlying market opportunity over the forecast period could be much larger.

High iPhone profit margins

We estimate that Apple's iPhone gross margins were about 45% in 2016, compared to around 22% for the Mac.

KEY TRENDS

Increasing Competition and Saturation in High-end of Smartphone market

In June 2007, when Apple entered the then-nascent smartphone market with the iPhone, Nokia and RIM were the only players in this segment. iPhone's success led to the entry of other players in the market, that has seen a huge spurt in demand in the recent years. Today, consumers have a huge array of smartphones to choose from, including premium Android smartphones from Samsung and Google and low-cost manufacturers such as Lenovo and Xiaomi. While the smartphone market is expected to see high single-digit growth in the near term, much of the sales are likely to come from low and mid-priced handsets in emerging markets, while the high-end of the market - which Apple caters to - could become increasingly saturated. Apple posted a year-over-year decline in iPhone sales during FY'16. That said, 2017 could be a strong year for the iPhone, as Apple launched a trio of new iPhones, including the completely redesigned iPhone X.

Slowing iPad Shipments

Global tablet shipments declined by about 20% in Q4 2016, according to data from research firm IDC, driven by longer upgrade cycles for tablets and cannibalization from large-screen smartphones. Apple has been impacted, with iPad shipments declining by about -14% in 2016, likely because of increasing tablet saturation in developed markets where high-end devices such as the iPad are more popular. Apple appears to be taking a two-pronged strategy with its tablet sales - focusing on both value-priced tablets for casual users while catering to professionals with its higher powered iPad Pro devices.

Growth In Enterprise Market

In mid-2014, Apple signed a deal with IBM that will see the two companies working together to further their enterprise mobility initiatives by bringing IBM’s cloud computing, big data and analytics capabilities to the iPhone and iPad. With the partnership, IBM will develop industry-specific apps and solutions for iOS devices, optimize its cloud services for the iOS platform and help with marketing Apple devices to enterprises. While Apple has been successfully increasing its presence in the enterprise space, the deal with IBM will give the company a more well-targeted push. IBM brings to the table decades of experience in understanding the needs of business customers and also has a sizeable sales force needed to cater to large corporations.

Mac Outperforms PC Industry

While the global PC market has been shrinking, Apple has largely been able to buck the trend given its superior product differentiation, proprietary Mac OS software and applications, sleek design and premium build-quality. Apple also benefits 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. For instance, shipments of Mac computers grew by about 10% year-over-year in Q3 FY'17, compared to the global market which contracted by about 0.5% per IDC.

Services Present A Growth Opportunity

Apple's services business has expanded significantly and the division is now Apple's second largest in terms of revenue, ahead of the Mac division. While the App store remains the primary driver of growth, services such as Apple Music are also gaining traction. Apple's base of paid subscriptions on its platform has also been rising steadily, with about 240 million active subscriptions at the end of 2017.

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