- CNBC reports Apple (AAPL) gains from its privacy changes that are hurting Meta Platform (FB).
- In addition, Apple is now considering instituting a subscription option for phone upgrades, enhancing its returns.
- If these two platforms grow, Apple’s recurring revenue and free cash flow margins will continue to rise.
Apple (NASDAQ:AAPL) will benefit from its privacy changes that have caused so much damage to Meta Platforms (NASDAQ:FB). This is according to a report from CNBC earlier this past summer. This could greatly increase Apple’s ongoing free cash flow (FCF) margins and boost AAPL stock even higher.
But now there is another report that could keep the stock soaring. Apple is considering starting an iPhone subscription plan that includes hardware upgrades instead of regular purchases of new smartphones.
| AAPL | Apple | $174.88 |
Apple’s New Subscription Plan Could Boost FCF
News emerged this week from several sources that Apple wants to start an iPhone upgrade subscription service instead of regular purchases. But users will still have to pay for the telecom carrier phone service as well.
As Bloomberg points out, this is nothing more than leasing regular iPhone upgrades rather than buying them. It really services Apple quite well, since most people wait three years to upgrade their phones when they normally pay them off in two years. That has left a one-year gap with no revenue for Apple. It also benefits iPhone users since they can upgrade their phones after two years.
Bloomberg shows how Apple comes out ahead in this scenario. It gets the benefit of amortizing the purchase of three phones over six years instead of just two phones.
This will significantly improve Apple’s already ample free cash flow margins. Apple enjoys a 35.6% FCF margin as of Q4. This is extremely high. It made $44.16 billion in FCF from revenue of $123.9 billion in quarterly revenue.
If these subscription plans go through, Apple could gain another year’s worth of margins over a six-year cycle, or another 16.7%. So theoretically, that raises its margins by 16.7% to 41.5%. We can use that to assess Apple’s value.
What AAPL Stock Could Be Worth
To be conservative, let’s assume Apple can raise its ongoing FCF margins to 40%. We can apply that estimates of the company’s forecast revenue.
For example, 40 analysts surveyed by Refinitiv have an average revenue forecast for 2022 of $395.96 billion. And for 2023, their estimate is $418.34 billion. That represents 8% year-over-year (YOY) growth in 2022 and 5.6% YOY growth in 2023. These are not especially high growth rates. But the amount of FCF profit it generates from this revenue is massive.
For example, assuming 40% of revenue in 2023 will turn into free cash flow, Apple will generate $167.3 billion in FCF that year. We can use that figure to estimate a target price for AAPL stock.
We can assume the market will value Apple with a 5% FCF yield. This is the same thing as using a multiple of 20 times. So, if we multiply $167.3 billion by 20, we get a target market capitalization of $3.347 trillion.
That represents a 17.4% upside for AAPL stock from its present market cap of $2.85 trillion. This means over the next two years, AAPL stock could rise at least 17.4% to $205.12 per share.
What to Do With APPL Stock
I suspect if Apple really does achieve a 40% margin, it’s very possible the market would put a higher multiple on its FCF. For example, at 25 times FCF, its market cap would be $4.183 trillion. That represents an upside of 46.8% for Apple over the next two years.
This would bring its valuation to $253.53 per share. Over the next two years, the average annual compound return works out to 21.14%. That is a very good return for most investors.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
