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Apple Inc (AAPL)

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WHAT HAS CHANGED?

Launch of New iPhone XS, XS Max and XR

In early September 2018, Apple launched a trio of new iPhones including a refreshed iPhone X, called the iPhone XS (starting at $1,000), a new plus-sized version called iPhone XS Max ($1,100) and a relatively more affordable 6.1 inch LCD version called the iPhone XR ($750). While we don’t expect the new lineup to drive unit volume growth to the levels seen during the iPhone 6 cycle, due to a mature smartphone market, revenues should still see a very healthy jump due to a continued uptick in average selling prices, with mid-range iPhone customers likely to upgrade to the XR and premium buyers likely opting for the new iPhone XS Max (top models cost $1,450) .

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 decline from around $167 billion in FY'18 to about $143 billion in FY'19, while stabilizing at these levels over the long-term. 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 revenues meaningfully. If the company is able to improve its revenues to levels of around $160 billion by the end of our review period, with gross margins rising to about 39% from our current forecast of 38%, 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 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 estimated 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.

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 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 expand, 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 and we expect the company to post a double-digit percentage decline over FY'19 as well.

Services Present A Growth Opportunity

Apple's Services business has grown at a rate of over 20% between FY'15 and FY'18, eclipsing the iPad and Mac to become the company’s second-largest business segment with revenues of about $37 billion in FY'18. 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 330 million active subscriptions at the end of FY'18.

iPad Shipments Gaining Traction on New Launches

Global tablet shipments have been sluggish on account of longer upgrade cycles for tablets and cannibalization from large-screen smartphones. Apple has been impacted, with iPad shipments declining by about 4% in FY'17 and remaining almost flat in FY'18. However, things could turnaround in FY'19, driven by Apple's two-pronged strategy of focusing on both value-priced tablets for casual users while catering to professionals with its higher powered iPad Pro devices, which are priced as high as $1800.

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.

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