Last week, yours truly penned some less-than-thrilling comments about Apple (AAPL) following its much-ballyhooed unveiling event for the new iPhone 6s, the new iPad Pro and its new TV set-top box.
Specifically, I suggested that although the company’s products were still technological marvels, they weren’t cutting-edge ideas any longer, and as such, Apple stock was becoming just another run-of-the-mill investment.
As one can imagine, it was a premise not well-received by all.
See, AAPL is not only widely owned, but its owners tend to be fiercely loyal to the company and verbally support it whenever the Apple stock price is threatened.
That’s fine — everyone’s entitled to an opinion and their own interpretation of the facts.
I still contend, however, that the lack of new-product innovation and increasingly smaller technological leaps between each device’s generations mean the company isn’t what it used to be. Over time, that waning “wow” factor will show up on the bottom line.
With that being said, calling Apple stock a “run-of-the-mill” consumer technology stock is hardly a scathing indictment. As I noted of it then (and several times prior), AAPL on its worst day is still a better investment than most other companies are on their best days.
To that end, it’s worth looking at Apple from the other side of the table, underscoring and critiquing a well-reasoned bullish case on AAPL that suggests the stock is worth 50% more than its current value with the company’s new iPhone leasing in place.
iPhone Leasing a Potential Game Changer?
The assumption in question largely came from Mark Mulholland, portfolio manager of the Matthew 25 Fund (MXXVX).
His math makes good sense on the surface. In light of this year’s estimated pretax profits and assuming a price multiple of 11 times that figure, Mulholland says he sees AAPL as being worth $170 per share based on the foreseeable future of the iPhone leasing program Apple now offers … and the immediate impact it could have in 2015.
Moreover, he has upped that price outlook to a range of between $200 and $250 per share further down the road based on the current leasing option.
RBC Capital Markets analyst Amit Daryanani largely agrees that the iPhone leasing option that kicked off with the iPhone 6s could be a key driver of revenue growth.
His math? Assuming iPhone fans who lease their phones upgrade about once per year as new versions come out (which is the pace Apple has set, more or less), the $32-per-month fee generates $384 worth of lease revenue on a device that costs $350 to make.
Once that leased phone is turned in, however, Daryanani contends it can be refurbished by Apple and resold at a price of around $500. Thus, the device that cost $350 to manufacture can produce $884 worth of revenue in a little over one year, and Apple has just devised a brilliant way to ensure the upgrade cycle has been whittled down from a previously typical 24 months to 12 months.
In that light, the iPhone leasing plan looks like a real boon for those fortunate enough to own Apple stock.
As is always the case, though, there’s a flip side to this coin.
On the Other Hand …
In the interest of completeness, the observations from the other side of the equation have to be voiced. There are two big ones.
First, though not foremost, the assumption that a 1-year-old refurbished iPhone can be sold for $500 may be optimistic.
To be fair, refurbished iPhone 6es that are now about 1 year old are indeed selling for $500, give or take. But, with 135 million iPhones being sold in the first two quarters of the device’s launch and sales of the iPhone 6s projected by some to be even greater, the law of supply and demand may finally start to kick in in a meaningful way. That is, a healthy supply of used iPhone 6 and soon iPhone 6s devices could crimp the secondhand value of iPhones in the future.
The other, bigger potential impasse is a related one — saturation.
We’re not there yet, and may never actually get all the way there. However, there’s a limit to the number of mobile phones the world needs, and there’s an even smaller figure the world is capable of owning.
Fans and supporters of Apple stock will be quick to point out that there are less than 2 billion smartphone owners on the planet now, versus a global population of 7 billion, implying a completely untapped market of 5 billion individuals. The bulk of those 5 billion people, however, will likely never own a smartphone in their lifetime.
Said another way, the easy smartphone markets have been tapped.
To grow market share from here, Apple will mostly have to take away market share from other competitors. With the advent of a company-supported iPhone leasing option, however, Apple is now largely competing with itself. That’s sure to further slow down the company’s already-slowing iPhone sales growth rate.
Be that as it may, there’s little doubt that the launch of the iPhone leasing service is going to benefit Apple’s stock price and shareholders; there’s still some time and room left before saturation becomes a major headwind for the company.
And yet, the best thing owners of Apple stock have going for them in the meantime is the fact that, as widely purchased as the iPhone 6 was, most current iPhone users still have older models and are still primed for an upgrade.
The specifics: Of the 475 million estimated iPhone owners in the world today, only 120 million of them own an iPhone 6. The 355 million others own an iPhone 5s or earlier model, and as such are in need of an upgrade.
In other words, Apple could do very well with the iPhone 6s without even adding one new iPhone user to its customer base.
Bottom Line
My original thesis from last week still stands — Apple needs to start innovating (with ideas bigger than 3D Touch) if it wants to remain in its position of category dominance. Given the smaller and smaller advances each version of the iPhone seems to offer versus the previous generation, an upgrade to the iPhone 6s could be the last one many iPhone fans make for a long while.
All the same, Apple should be able to milk the existing opportunity for a couple of years before being forced to deal with an oversupply of nice phones and a seriously waning demand for them. That’s good enough for now. Let’s just hope the company does something really innovative before it runs out of time and loses its luster.
Bottom line? Mulholland’s near-term target of $170 is plausible.
It remains to be seen, however, if his long-term stretch target of $250 is really within reach given the company’s current product line and promotional efforts.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
