It will be a very interesting next few years for Apple (NASDAQ:AAPL) as the company continues to pivot its business model. We’ve seen a more than 40% haircut in Apple stock from its fourth-quarter highs to its lows. That’s an extreme fluctuation for any stock, let alone for a company that was the largest by market cap before the decline.
With its changing business model though, it may be time to start rethinking Apple stock going forward.
Historically, the company has garnered a low valuation, in part because investors think of AAPL as a hardware company susceptible to the whims of consumers. That’s one reason why Apple has generally commanded a lower valuation than its mega-cap peers like Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG) NASDAQ:GOOGL).
Should the rhetoric change though?
Apple’s Business Model Is Shifting
Are you familiar with the razor blade business model? The strategy involves a company practically giving away a shaver with the hope of generating replaceable razor sales. The goal is to get consumers to replace the blades as they dull, essentially securing recurring revenue in the future. This type of business could be thought of as one of the early subscription models — the same model that cloud companies garner such a high valuation for.
Because of this secured revenue, companies will practically give the razor away for free in hopes of hooking new customers. AAPL is sort of like that, only instead of giving away iPhones and iPads, the company is generating record profits and commanding industry-leading margins.
As if this model weren’t profitable enough, Apple’s goal isn’t simply iPhone sales. Instead, it’s using this base of a billion-plus devices to drive Services revenue. Whether that’s through AppleCare, Apple Pay, iTunes, subscriptions services or App Store sales. As the number of devices grows and we become a more digitized economy, Apple is set to reap massive rewards.
Can AAPL Earn $15 in 2021?
Needham analysts recently upgraded Apple stock from buy to strong buy.
In doing so, the analysts also upped their target on the AAPL stock price from $180 to $225. They argued that AAPL should be viewed more like an ecosystem rather than just a product company.
Then Cowen analysts slapped a $220 price target on AAPL stock after initiating it as a buy. Analyst Krish Sankar said, “We view the Services business as an investable long-term theme as EPS contributions can double to $6 by fiscal year 2021, and increasing recurring revenues should drive a higher multiple.”
Consensus estimates call for Apple to earn $14.21 per share in 2021. If Sankar is right and Services continues to hum, perhaps the company could be pushing $15 in earnings-per-share. If Apple garners even more momentum in its Services unit, that figure could swell even higher. Of course, that may depend on some of its Monday, March 25 announcements. Many are expecting new subscription services to be announced by AAPL.
Apple Stock: There Are Risks
While iPhone sales are the company’s bread and butter, and although Services growth is robust — now churning out $10 billion per quarter in revenue — Apple isn’t immune. First, I didn’t like the company’s strategy in changing iPhone names. It’s the first time I’ve heard confusion from a large portion of customers. Because Apple makes great products, it means consumers don’t have to upgrade as often as management may wish. Either way, the added confusion doesn’t help drive any more customers through Apple’s front door.
Second, there has been a lot of pushback by companies — like Spotify (NYSE:SPOT) — and developers for the percentage fee Apple takes from App Store sales. Should Apple have to trim its fee, revenue and profit will be hurt.
Finally, whether we classify Apple as a hardware company, a software, services and subscription company or something in between, it all hinges on one thing: the consumer. If the economy falls into recession, Apple’s top and bottom lines will suffer.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he was long AAPL, GOOGL and AMZN.
