When shares of Apple (NASDAQ:AAPL) topped $137.98 in September, stock markets were not in a selling mood at the time. Tesla (NASDAQ:TSLA) had previously announced a stock split and then Apple followed. Novice investors who did not know that the split creates no value bid shares of Apple stock higher.
Although having more stock float increases liquidity and a lower share price will attract smaller investors, Apple needs higher unit iPhone sales. A delay in the iPhone 12 launch hurt last quarter’s result.
This time, the iPhone 12 Mini will reverse the lull in smartphone sales.
AAPL Stock Has Limited Upside
For the next few weeks, Apple is unlikely to reward investors with the same 9% return as the previous week. Valuations are unfavorable as the price-to-earnings ratio approaches 40 times. Investors could buy Microsoft (NASDAQ:MSFT) at the same multiple and get better growth.
Still, Apple is consistently growing services business benefits from high margins. After it bundled its service (such as apps and music), sign-up rates should increase.
Apple shares score a 95/100 on quality, based on its historic margin strength:
In the fourth quarter, Apple posted fourth-quarter revenue of $64.7 billion, up 1% from last year. iPhone sales worth $26.44 billion did not meet the $27.73 billion consensus estimate. Due to the pandemic pushing computer sales, Mac sales at $9.03 billion easily exceeded the $7.93 billion consensus.
Value investors will consider Apple’s meager 1% revenue growth rate as too low. Yet, sales did not grow as fast because Apple launched the iPhone 12 models in the current quarter. The holiday season is approaching. Consumers who waited for two phone generations (on iPhone 7 or 8) will want to upgrade to the latest device.
iPhone 12 Mini Most Popular
At a starting price of only $699, Apple fans may go for the iPhone 12 Mini. Consumers may forego the bigger and heavier iPhone 12 Pro Max, iPhone 12, and iPhone 12 Pro models. They will not get such features as advanced Lidar camera focusing. As a compromise, the Mini will weigh less, and at a smaller size, still offer a massive 5.4-inch display.
If Apple single-handedly ends the trend for the “bigger is better” smartphone, then unit sales will grow in the low- to mid-single digits this quarter. The more Android users it converts to the Apple ecosystem, the more subscription revenues it might earn from Apple One.
Apple is also offering the subscription as a trial. After that, the monthly subscription is $14.95 per month for individuals, $19.95 a month for the family plan, and $29.95 a month for the premier package.
Investors may build a 5-year discounted cash flow model to estimate Apple’s fair value. Based on the metrics below, Apple is worth over $150 a share:
|Discount Rate||7.5% – 6.0%||7.00%|
|Perpetuity Growth Rate||3.5% – 4.5%||4.00%|
|Fair Value||$117.42 – $295.05||$152.46|
Data from finbox
Readers may open the financial model by clicking on this link. Change the perpetuity growth rate and annual revenue growth rates. In doing so, the fair value calculation will change accordingly.
Given the continued low-interest rate environment, the accelerating demand for 5G-enabled iPhones, and Apple One, investors should set a generous growth rate forecast. The iPhone 12 will support 5G networks and are compatible with both mmWave and Sub-6GHz 5G. In the U.S., the latter is the most widespread. It is generally faster than LTE but consumers may not notice a difference.
As the months pass and Apple gets close to reporting its next quarterly results, shares may trend higher. Investors who hold the stock should not sell. Those who did not have a position this year might want to wait for a dip led by a general technology stock correction before buying.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.