Back in the ’60s, ’70s, and even the ’80s, you had to rent your handset phone device from AT&T (NYSE:T) or one of the Bell telephone companies. I remember in college and graduate school, every time I went back to school I had to pick up a handset and pay $10 a month just to rent it. Now, Apple (NASDAQ:AAPL) wants to do something similar. It could significantly boost AAPL stock.
According to Bloomberg magazine, Apple may start a “subscription” plan for their iPhones. Their phones are so expensive now that people are no longer upgrading every 2 years. They are waiting longer and Apple needs this to stop. The way around it is to essentially lease a phone that allows you to upgrade every 2 years. You never own the phone. You just upgrade and keep paying a $60 or $80 charge. This is on top of the monthly service you have to pay to the carrier.
This will be great for Apple and for their massive free cash flow (FCF). But it might not be all that great for consumers.
AAPL Stock Will Benefit from Higher Free Cash Flow
As Bloomberg points out, this is the same as leasing regular iPhone upgrades rather than buying them. It really serves 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 FCF margins. Apple enjoys a 35.6% FCF margin as of 2021’s fourth quarter. 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%. Here is how that would increase Apple’s value. If we assume its margins rise to 40% and if the market gives AAPL stock a 5% FCF yield, its market value could rise to $3.47 trillion. That is 19.1% higher than its $2.809 trillion market cap now. That could push AAPL stock to $205 per share.
Consumers would be happy since they would get free upgrades as long as they kept renewing their subscription plans. But this will only feed the beast. Apple will get to continue racking up higher and higher prices for their phones. The downside is that just like in the ’60s through the ’80s, you will be stuck renting a device, never owning it. But AAPL stock will keep rising. So that is the tradeoff between investors and consumers.
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.
