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  • Important disclosures appear on the last page of this report.

    The Henry Fund

    Henry B. Tippie College of Business

    Mohan Wang [[email protected]]

    APPLE (AAPL) April 15, 2020 Technology Hardware Provider Stock Rating Buy

    Investment Thesis Target Price $246-$406 Apple offers many products, such as iPhone, iPad, Mac, and Apple Watch. In 2018 and 2019, Apple’s biggest source of sales, iPhones, saw a decline in sales. However, Apple is shifting its revenue mix towards the service segment which saw a huge revenue growth in the last two years. We believe that Apple will continue to develop its service segment while providing innovation products to the consumer. Therefore, we recommend a BUY rating on Apple. Drivers of Thesis

    • Apple’s non-iPhone businesses, particularly services segment is expected to drive sales growth in the next four years. The service segment has emerged as the company’s new cash cow. Apple currently has more than 450 million subscribers1 across its service segment. As Apple’s App store, TV+, Apple Music, and Apple Arcade continually to gain subscribers, we expect Apple’s sales from service segment to be growing at 21% to 26% from 2021 to 2023.

    • We believe that Apple will offset the weakness in iPhone sales by developing their service segments while collecting more sales from products such as Airpods, Apple Watch, and accessories. Therefore, we forecast Apple’s sales coming from wearables, home and accessories segment will increase at 13% in 2021.

    Risks to Thesis

    • The iPhone comprised a large portion of Apple’s revenue. The iPhone saw a decrease in sales in 2018 and 2019. We believe that it is risky to have one revenue segment making up the majority of sales.

    • We believe that Apple’s retail stores continue to contribute a meaningful percentage of sales. Depending on timing of global stores reopening, we expect this to have an impact on Apple’s 2020 total sales. Therefore, we forecast a total sales growth of 0.5% for 2020 as we believe that closing retail stores would hurt Apple’s sales.

    Henry Fund DCF $406 Henry Fund DDM $246 Relative Multiple $361 Price Data Current Price $287.05 52wk Range $170.27 – $327.85 Consensus 1yr Target $305.37 Key Statistics Market Cap (B) $1.256T Shares Outstanding (M) $4472 Institutional Ownership 61.9% Five Year Beta 1.29 Dividend Yield 1.1% Est. 5yr Growth 11.4% Price/Earnings (TTM) 12.66 Price/Earnings (FY1) 18.4 Price/Sales (TTM) 4.66 Price/Book (mrq) 13.35 Profitability Operating Margin 24.3% Profit Margin 37.6% Return on Assets (TTM) 15.7% Return on Equity (TTM) 55.9%

    Earnings Estimates Year 2017 2018 2019 2020E 2021E 2022E

    Consensus $12.67 $13.48 $14.52

    EPS $9.27 $12.01 $11.97 $11.17 $11.38 $11.20 growth 11% 30% -0.3% -21%% 19% 16%

    12 Month Performance Company Description

    Apple designs, manufactures, and markets consumer electronics and computers, and has developed its own proprietary iOS and Mac OS X operating systems and related software platform/ecosystem. Revenues are principally derived from the iPhone line of smartphones, hardware sales of the Macintosh family of notebook and desktop computers, iPad tablets. The company also realizes revenue from software, peripherals, digital media, and services1.







    27.2 18.1














    A M J J A S O N D J F M

    AAPL S&P 500

    Data Source: FactSet

  • Page 2


    Apple Inc. is an American multinational company that designs, develops, and sells consumer electronics products. In the past five years, the cumulative total return on Apple stock has increased by 331%. We recommend a BUY rating on AAPL.

    Apple’s biggest source of sales, iPhone, saw a decline in sales in 2018 and 2019. However, Apple’s service segment is gradually offsetting iPhone sales losses. We believe that Apple will generate more sales as they start to offer more services. In addition, we believe that Apple’s ecosystem with their products will help retain customers.

    The coronavirus has disrupted Apple’s supply chain, but as factories in China are up and running, we believe that Apple’s supply chain issues will only be temporary.






    Wearables, home and Accessories

    (AirPods), (Apple TV), (Apple Watch) (Beats Products), (HomePod) (iPod Touch)

    (All Products Summary)

    General Services Subscription Services


    Digital Content Stores (App Store)

    Apple Music Apple Card

    Apple Care Apple TV+ Apple Pay

    iCloud Apple News+

    Apple Arcade

    (All Services Summary)

    Apple’s business primarily runs around its flagship iPhone. However, the Services portfolio that includes revenues from cloud services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services now became the cash cow.

    Moreover, non-iPhone devices like Apple Watch and AirPods gained significant attention. In fact, Apple dominates the Wearables and Hearables markets due to the growing adoption of Watch and AirPods. Solid uptake

    of Apple Watch also helped Apple strengthen its presence in the personal health monitoring space.

    Apple’s other services include subscription-based Apple News+, Apple Card, Apple Arcade, new Apple TV app, Apple TV channels and Apple TV+, a new subscription service2.

    Apple stopped reporting unit sales in fiscal 2019. In 2018, they reported a total unit sale of 279466 (in thousands). Apple’s total revenue in fiscal 2019 declines compared to its total revenue in 2018, which was $265,595 million. As a result, we assume that Apple’s total unit sale in fiscal 2019 has a decreasing trend.

    In fiscal 2019, Apple generated $260,174 million in total revenues. The company’s flagship device iPhone accounted for 54.7% of total revenues. Services, Mac, iPad and wearables, home and accessories category contributed 17.8%, 9.9%, 8.2% and 9.4%, respectively.

    Data Source: Apple 10K, 2019

    Apple also reports revenues on a geographic basis, namely the Americas (North & South America), Europe (European countries, India, Middle East and Africa), Greater China (China, Hong Kong & Taiwan), Japan and Rest of Asia Pacific (Australia & other Asian Countries).

  • Page 3

    Data Source: Apple 10K, 2019

    Looking at the chart above, we can see that Apple’s revenue is heavily concentrated within just two countries, the US and Greater China, which made up 61.73% of Apple’s sales in fiscal 2019. We noted that Apple’s sales in China dropped 14% in fiscal 2019, which was largely reflecting a tough geopolitical landscape between the US and China. We believe that the relationship between the US and China is important to Apple’s survival, so we recommend tracking Apple’s future performance in the US and China.


    iPhone sales increased 17% from the year-ago quarter to $265,595 million and accounted for 62.08% of total sales. Customer response was exceptional for the new iPhone 11, 11 Pro and 11 Pro max. Moreover, sales benefited from trade-in programs, which doubled on a year-over-year basis.

    Apple quoted a recent survey report from 451 Research, which stated that customer satisfaction was 98% for iPhone 11, iPhone 11 Pro and 11 Pro Max combined1

    However, Apple is experiencing growth issues with their

    iphones, especially in fiscal 2019. Apple released iphone 11

    and iphone 11 Pro with more advanced cameras and faster

    processors back in September 2019. But iphone sales

    down by -14% compared to 2018 as consumers have

    shown they are not as interested in spending upwards of

    $1000 on a new phone, and as people continue to hold on

    to their phones for three or four years instead of

    upgrading every one or two years.

    The chart below shows the price of an iphone over the past

    nine years. An increasing trend suggests that Apple is

    slowly positioning them as a luxury band. Iphone 11 had

    one of the highest selling prices in this history of iphones,

    but the slowdown in iphone sales in 2019 indicates that

    consumers’ willingness of spending $1000 on an iphone


    Data Source: Digital Information World

    In 2020, Apple is expecting to release several iphone models in 2020: iphone 9, iphone SE2, iphone 12, and iphone 12 Pro. iphone 9 and iphone SE2 are targeting at lower price smartphone market while iphone 12 and iphone 12 pro are competiting at a higher price smartphone market.

    We forecast iphone revenues will drop by 9% due to the slowdown in demand and supply for iphones as many countries reinforce shelter-at-home and mandated store shutdowns orders. Although new iphones will likely to draw customers’ attention, we expect that total iphone sales will drop again due to the significant impact of the coronavirus in 2020, which we will discuss later in this report.

    Data Source: Statista

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