IPhone 6 Will Drive Apple Stock Price Gains In FY 2015

  • iPhone 6 could add $100 per unit to Apple revenue, while the average incremental cost of manufacturing will be $23.
  • The incremental impact of iPhone 6 sales could be $15 billion addition to revenue and $10 billion addition to bottomline in FY 2015.
  • We update our Apple target price to $130. Our Apple stock analysis continues to assign a buy rating to the stock.

Apple (AAPL) stock has been on a roll, having gained over 45% in the year-to-date. A number of events have occurred since our Apple Q4 earnings review. One of the major events was the launch of the iPhone 6 and its smashing performance. Due to the strong performance of the iPhone 6, a number of analysts have lately hiked their Apple target price. The strong performance is expected to continue in Q1 2015, with launch in China being a major catalyst in this quarter.

We today update our outlook on the stock in light of recent developments.

iPhone 6 impact on Apple FY 2015 revenue and profits

In an earlier post on how iPhone 6 can add to Apple revenue, we had highlighted that every additional iPhone 6 sold could add $100 in incremental revenue to Apple. However, the cost of manufacturing the new phones is only marginally higher, as seen from the chart below.

iPhone manufacturing costs
Source: techinsights.com

The incremental cost of manufacturing an iPhone 6 is $15.5 while the incremental cost of manufacturing an iPhone 6 plus is $31. The average incremental cost of manufacturing the iPhone 6 could be $ 23, which means that over $75 per unit of iPhone 6 and 6 plus sold could drop down to Apple’s bottomline in FY 2015.

There have been reports claiming that Apple sold over 21m iPhone 6 units in the first two weeks after launch. According to reports from various sources, iPhone 6 sales in FY 2015 could range from 148 million, according to BMO capital markets analyst Keith Bachman to over 200 million units, according to a Digitimes report.

We use the above numbers to estimate the impact of iPhone 6 sales on Apple bottom line in FY 2015.

in billions of $

Lower range

Upper range

Average

iPhone 6 sales (in millions)

148

200

174

Incremental cost of production ($)

3.4

4.6

4.0

Incremental revenue ($)

14.8

20.0

17.4

Incremental bottomline addition ($)

10.4

14.0

12.2

Based on our estimates, the iPhone 6 could drive up to a $10 billion addition to Apple bottom line in FY 2015.

Apple Valuations

Apple PE ratio movement over the last one year is shown in the chart below.
AAPL stock chart
Source: Apple stock price chart and PE ratio comparison

Apple PE ratio has ranged from a high of 18.1 to a low of 12.4 in the last one year. Apple one year average PE ratio was 14.8.

in billions of $, except per share value and number of shares

Target Price estimate

Incremental bottomline addition

10.4

14.0

12.2

FY 2014 Net Profit

39.5

39.5

39.5

Estimated FY 2015 Net Profit

49.9

53.5

51.7

Market Cap (@ PE of 14.8)

738.1

791.9

765.0

Number of shares (in billions)

5.9

5.9

5.9

Target Price per share

125.7

134.9

130.3

Using the historical one year valuation range and the net addition to Apple profits in FY 2015, we update our one year target price for Apple stock to $130. In-Line with our positive outlook on Apple stock, our Apple stock analysis rates Apple a buy. Keep reading for our latest updates on technology stocks.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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