It would be a gross understatement to say Apple Inc. (NASDAQ:AAPL) stockholders have high expectations for the company, particularly for the highly anticipated launch of iPhone 8 — the tenth anniversary of Apple’s world-changing device.
The impact the phone, which rumors suggest will cost as much as $1,000 (a price I’m willing to pay), can have on Apple stock is enormous.
But not everyone agrees the phone — regardless of its premium features — should command such a price tag. Reports also suggest the new iPhone could fetch as much as $1,400.
Apple’s Pricing Muscle
In a survey by Barclays, just 11% of consumers said they would spend more than $1,000 on an iPhone. Most consumers said they would spend around $582 for a direct purchase or enter a payment plan of under $50 per month spread out over a twelve-month installment.
Compared to other devices from original equipment manufacturers — such as Samsung Electronics (OTCMKTS:SSNLF) or Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — Apple operates in a higher echelon.
As such, Barclays estimates almost 20% of current iPhone owners would spend more than $1,000 for iPhone 8. I would venture to say, that had Barclays only polled current iPhone owners, the number of respondents who would be willing to spend $1,000 or more would easily exceed 50%. Apple has worked for its premium branding and has attracted premium customers who are loyal to the brand. As for iPhone 8, the device will sell itself.
The smartphone, which is expected to launch on time based on the company’s fourth-quarter revenue guidance, will feature an OLED curved screen, giving the device a larger screen size without increasing the device’s physical size. Among other features, iPhone 8 will have capabilities including wireless charging, 3D sensing and VR/AR technology.
Analysts at Goldman Sachs recently described Apple as a “beneficiary of the “hardware premiumization” trend.” In other words, price is not a factor to the brand, nor to the relationship consumers have with iPhone. As for those who are, in fact, more price conscious, Apple is expected to release two other iPhone models, presumably dubbed iPhone 7s and iPhone 7s Plus.
Launching three devices during this so-called “super cycle” will allow consumers to decide which model is right for them. As for Apple’s pricing power, and thus, its profit margins, this will depend of the volume sold among all three models.
In the third quarter, not only did Apple report 41 million iPhones sold, which topped Street estimates, the company also reduced channel inventories by more than three million units. Reducing inventory ahead of a new iPhone launch is something Apple has struggled to do.
Apple Flexing Tons of Muscle
Here’s what we know: During the Q3 Apple’s sold iPhone by an average-selling-price (ASP) of $606, which, when multiplied by 41 million iPhones sold, came out to $24.8 billion. This means Apple is heavily reliant on the iPhone, which accounted for 55% of Q3 revenue (total Q3 revenue was $45.4 billion).
Why is that important?
Considering that Apple guided current-quarter revenue in the range of $49 billion to $52 billion (against estimates of $49.2 billion), this means there are no signs of slowing down.
From my vantage point, it means Apple expects to sell a higher mix of the $1,000-plus iPhones than sub-$1,000 devices. Assuming this achieves higher ASP, also means higher profit margin, and thus, justifies a higher stock price.
For the quarter that ended September, Apple is expected to earn $1.89 per share on revenue of $51.07 billion, translating to year-over-year growth of 13.17% and 9%, respectively. For the full year, earnings are projected to rise 8.5% year-over-year to $9.02 per share, while full-year revenue of $227.67 billion would rise 5.6% year-over-year.
Bottom Line on AAPL Stock
Paying $1,000 for phone might come as sticker shock for some people and Barclays might be right. But few companies know their customers as well as Apple. And the company is willing to bet that its customers have the means and are willing to pay for a premium device. As such, Apple’s fiscal year and 2018 estimates appear too low.
Based on fiscal 2018 consensus estimates of $10.80 per share, Apple stock is priced at forward P/E of just 14, which is about four points below the S&P 500.
Assuming Apple stock was priced on par with the rest of the market, the shares would trade today at around $190, making AAPL stock the best tech bargain on the market.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
