- Apple Watch ($11.81 billion) and Apple Payment ($2.1 billion) will contribute significantly to annual sales.
- Apple iPad shipment volume may grow by 40% to 50% assuming product refresh and higher average selling price while Apple iPhone shipment volume may reach 235 million in fiscal year 2015.
- The current problems relating to iPhone 6 Plus and iOS 8 are short term and will not impact the long term performance of Apple.
Investing in Apple (NASDAQ:AAPL) at near all-time highs may be a little nerve wracking. However, the fundamentals of the company remain relatively strong, as new product launches along with continuing growth in pre-existing categories should sufficiently drive earnings and sales growth over the near and long-term.
However, to explain the Apple investment thesis we have to focus on 5 product categories, the Apple Watch, Apple Payments, iPad, iPhone, and application sales/services.
The Apple Watch will be a capable companion for consuming content, receiving notifications, and gaining real-time analytics on health and fitness. However, what really intrigued me about Apple’s upcoming Watch are the additional sensors that it will come with. Technically speaking the added sensor data may create new use cases that were not anticipated, as many of these sensors were implemented with the intention of monitoring health. However with those additional sensors different forms of functionality may emerge, which may help in differentiating the Apple Watch from the iPhone and iPad.
The upcoming product is expected to have really high profit margins, and when based on historical success, I have relatively high conviction that this specific category will do extremely well. In an earlier article I project that the Apple Watch will generate $8.6 billion in net income.
The new device is clearly best in class when compared to other products, and preliminary production figures indicate that unit shipments should be in the range of 40-50 million units. Assuming this story plays out, Apple will easily hop over analyst estimates in FY 2015.
Apple Pay will become a bigger contributor to sales and earnings as iPhone 6 sales begin to ramp. Apple payments will use NFC technologies, and will work with iPhone 6 and iPhone 6 Plus. Apple has partnered with payment processors, banks, and merchants to roll out the service and many have already upgraded their POS in response to Apple’s upcoming mobile payment solution.
This specific service is expected to generate $.15 per $100 in transactions. In an earlier estimate I expected Apple to earn something similar to what Visa and MasterCard earn from debit and credit card transactions. It turns out that I was right about this; therefore I’m going to reiterate my $2.1 billion annual sales estimate for Apple payments, and when working with a 45% net profit margin, I estimate that annual net income will be $959 million at the end of fiscal year 2016.
The next generation iPad is expected to be released in October, and it’s likely that this device will come with cutting edge components, paired with a new OS update. While the device will experience incremental change from previous generations, a major refresh is long overdue.
I anticipate that this device will enter a significant refresh period in which the device generates significant volume growth, which should translate into sales and earnings growth. Older iPad owners haven’t really “refreshed” from older generation iPads. Assuming this holiday season, or the next drives upgrades, the iPad segment should drive significant sales growth in fiscal year 2015/2016.
In an earlier Amigobulls post on iPad I had mentioned:
Shipment figures may be higher by as much as 50% over the prior year comp. This is because a combination of new customers paired with refresh from the pre-existing installed base should drive significant volume growth. The current ASP figures for iPads are $443 (combining the iPad mini with iPad). Therefore, if shipment figures grow to 105 million units in fiscal year 2015, revenue from the iPad segment may in fact reach $46.5 billion.
Furthermore, I think profitability for the segment may improve, as the iPad 12.9 inch model should have a gross margin rate of 42% to 50%. However, iPad users tend to share their device with other members of the same household. So there are some micro factors that may challenge my assumptions. Even so, I think that these factors are already baked into prior comps from previous years, and a refresh will result in meaningful shipment growth.
The Apple iPhone 6 is the most advanced version of the iPhone yet, and while the incremental changes isn’t necessarily revolutionary, a better CPU/GPU, updated operating systems, better screen technologies, weight improvement, battery life improvement, additional sensors (i.e. NFC), improved camera performance add up to a compelling reason to upgrade. Furthermore, consumers have the ability to trade-in older devices to help pay for their next upgrade, which is why Apple is expected to have another record setting year for its most well established product category.
Demand for the upcoming product has been fairly robust, and the larger form factor iPhone 6 Plus model will have significantly improved gross margins over the iPhone 6 counterpart. What’s nice about the iPhone 6 is that it won’t come with a sapphire screen, which reduces the risk of supply constraints on a product that’s heavily in demand. Instead sapphire will go in the Apple Watch, which would experience much better marginal benefit from having a scratch proof surface.
I estimate that the iPhone 6 Plus model will have much better profit margins, as the $100 price differential will be nearly pure profit, which is based on prior analysis that compares the bill of materials between varying form factor devices.
JPMorgan analyst, Rod Hall anticipates that iPhone shipments may reach 235 million in fiscal year 2015. The iPhone 6 Plus already sold out. The good news is that this device has higher gross margins, and I have high conviction that the upcoming iPhone 6 product line-up will drive revenue and net income growth. However the net income growth will be more significant in the upcoming fiscal year.
Apple app/iTunes store/accessories
Following the acquisition of Beats Audio this category will get a decent boost in sales, and it’s likely that the acquisition will give consumers the option of buying high-end peripherals either from Apple or Beats. Beats Audio generated $1.5 billion in annual revenue in 2013.
Research firm Macquarie projects that application sales, software, media (iTunes) will generate $30 billion on a gross revenue basis, and that figure is expected to grow to $72 billion over the next six years. Given the strong growth in its product ecosystem, the total number of consumers for media, games, and software should increase at a pretty high rate. However, the average spending figure per consumer should also increase, which is another factor contributing to growth in this specific segment. Macquarie believes that Apple application store will generate a 15.71% CAGR.
In conclusion Apple has many growth catalysts that are coming into play in this upcoming fiscal year. Investors should be opportunistic buyers on pull backs as the underlying investment thesis in the company is driven by product refresh, new product categories, and services that will have meaningful impact to top and bottom line results.
Furthermore, Apple has a $90 billion share buyback program which will reduce the total share outstanding figure driving further stock appreciation.