Gene MunsterAugust 21, 2018
Apple as a Service Inching Shares Higher
Apple

  • Apple’s investment paradigm is shifting, as evidenced by the stock’s recent, steady rise.
  • Shares are up 13% since Apple reported earnings on July 31st (6% on the report and 7% in the 14 trading days since).
  • Skeptics of the Apple as a Service paradigm shift attribute the stock’s run to the anticipation of new iPhones this fall.
  • Prevailing view: it’s a product cycle story. History supports this view — over the past 4 years, shares of AAPL have increased, on average, 4.1% from Aug. 1 to Sept. 1 in anticipation of new iPhones. Shares have fallen an average of 1.7% between mid-Sept. and mid-Oct.
  • Emerging view: Apple as a Service. Stable iPhone business, Services growth, a significant capital return, and new products.
  • We expect the stock to continue its move higher after the iPhone announcement this fall, driven by the Apple as a Service paradigm shift.
  • The Jun-18 quarter represents the 8th consecutive quarter of stable y/y iPhone growth. Average growth over the past 8 quarters has been 1% y/y.
  • We believe Apple will retire one-third of outstanding shares over the next 3 years, compared to investor expectations of 5+ years. That buyback alone could lift shares by 22%. We explain the mechanics here.
  • Factoring in the buyback, 7% EPS growth, and Apple’s current 15.8x forward multiple suggests a $300 per share price in 2 years. Assuming the paradigm shift yields a higher multiple (18x) implies a $340 per share price.
  • Apple’s strong and expanding relationship with its customers is underappreciated by investors, but foundational to future appreciation of Apple’s market cap.

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