- Apple Inc. is expected to launch a two version iPhone 6 and iWatch during the second half of 2014.
- An entry into the high profit margin watch industry and move to larger screen model iPhone 6 will significantly drive Apple’s topline as well as bottomline in FY 2015.
- At the current price levels, Apple is a buy primed for a 15% upside over the next year and a half.
‘Apple has the best product line up in 25 years’ claimed Apple (NASDAQ:AAPL) SVP Eddy Cue at the code conference. This is a statement which has left apple loyalists and analysts guessing as to what are the surprises Apple has up its sleeve. The expectations have covered a two version release of iPhone 6 in addition to the iWatch, which could well be revolutionary in terms of the amount of data it can collect. So what does it mean to Apple in terms of revenues and profits? What does it mean to the Apple investor and are we on the verge of another bull run? Our today’s post covers these very concerns.
iWatch Will Drive Apple Profit Margins
iWatch will be a smart addition to Apple’s product portfolio. Are you wondering why? Let’s take a look at the table below.
Apple Gross Profit Margins Vs Movado & Fossil
|Revenue (in millions of $)||120.92||776.5||45,650.0|
|Gross profit (in millions of $)||65.15||443.22||17,950|
|Gross margin (in %)||53.9||57.1||39.3|
Apple has a strategy of premium margins, which makes the iWatch comparable to premium watchmakers like Movado and Fossil. Taking a look at the most recent reported numbers, it becomes clear as to why the iWatch could fit in well with Apple’s business. There is only one way the iWatch could drive Apple’s profit margins, and that is higher. Combine that with Apple’s vast supply chain and reach and we could be looking at billions of dollars in addition to Apple’s revenues and profits.
iWatch Will Augment Apple Revenue and Profits
The table below is an estimate of revenue and profit contribution of the iWatch to Apple’s financials.
|Units (in millions)||21||36|
|Total revenue (in million $)||6,300||10,800|
|Gross profit (in million $)||3,150||5,400|
Units sold and price based on UBS estimates
Based on the price and unit sales projection, Apple’s iWatch could add $6.3 billion to Apple’s FY 2015 revenues and close to $11 billion in FY 2016 increasing gross profits by $3.15 billion and $5.4 billion in 2015 and 2016 respectively. And these are just based on device sales and we haven’t yet accounted for the value of data the device could collect (think: health, location in real time). At a net Profit margin of 20% (slightly below Apple’s current margins), iWatch could add $1.26 billion and $2.16 billion to Apple earnings over the next two years respectively.
Apple Financials Will Get A Boost With iPhone6
Let’s now move on to Apple’s other new boy in the upcoming product line up; the larger screen iPhone 6 in two screen sizes at 4.7 inches and 5.5 inches. The smaller size in itself is a jump from the 4 inch size on the iPhone 5s. Can the larger devices move the needle significantly on Apple revenues?
According to the chart above, Apple couldn’t have better timed its entry into the larger screen size smartphone market. With the two rumoured versions at 4.7” and 5.5” Apple has hit the nail on its head.
Every updated release of the iPhone has fueled a higher number of sales and with the larger screen models coming up, Cupertino might even convert a significant number of Android users, whose android purchases were motivated by a larger screen. This could lift Apple topline further, with results starting to show in the first quarter of FY 2015 (December 2014 ending quarter).
In the absence of information on the sales by models, base our estimates for iPhone 6 sales on numbers from statisticbrain.com. The site reports total iPhone 5 sales of 89 million as of September 10 2013, one year after its launch. More importantly pre-bookings and sales in first 24 hours post launch have set a higher record with each successive model of the iPhone. In the absence of information on total sales of iPhone 5S, we base our estimates on the 89 million sales of iPhone 5.
According to sources, iPhone 6 will have an ASP which is $100 higher than the previous models. That could potentially mean $8.9 billion more to Apple’s topline, with a significant chunk of that dropping down to the bottom line. Accounting for the higher costs of parts (mainly larger screen), even a 50% drop to bottomline could boost Apple’s bottom line in FY 2015 by a whopping $4.45 billion solely from iPhone 6 sales over the next one year (FY 2015).
Source: Apple PE ratio chart by Amigobulls
Apple’s current price-to-earnings ratio of 15.1 is well on the lower side of its 5 year average historical earnings multiple. Given the additional topline and bottomline growth from new products in FY 2015, we could see Apple stock price soar higher even without taking into consideration the earnings multiple expansion which has taken place over the last one year. Apple P/E multiple has gone from 9.52 to 15.1 over the last one year.
The iWatch and iPhone6 could add an incremental $5.7 billion to Apple’s 2015 bottomline, which at a multiple of 15 could see Apple’s market cap swell by $85 billion, representing a 15% upside from the June 24th closing price.
In conclusion, Apple financials could see explosive top line and bottom line growth from the new product launches expected this year. At the current price levels, Apple stock could be in for a good run over the next year and a half. As per our Apple stock analysis, we have a positive long term outlook on the Apple stock.