We’re entering a new paradigm related to investing in Apple defined by 4 key themes that we call ‘Apple as a Service.’
- Greater visibility in the iPhone business (62% of revenue), albeit at a 0-5% growth rate. This stability is representative of a hardware business performing increasingly like a software business, a positive for AAPL’s multiple.
- Services. Building off of this predictable iPhone business, Services (now 15% of revenue) should grow at ~15% for the next few years.
- Capital return. Consistent annual share buybacks could approach $40- $50B per year. Assuming AAPL shares rise, that buyback alone could move shares 5% higher this year, 4% higher in 2019, 3% higher in 2020, etc.
- New products. Innovation will still be required for Apple to maintain its high iPhone retention levels (above 90%), but, in the new paradigm, new product categories represent optionality to the AAPL investment story. Specifically, we believe original content, AR (including glasses), and automotive autonomy are opportunities not yet reflected in Apple’s valuation.
Putting it all together, this yields a stable business that is growing at 5-10% per year and returning the majority of its profits to shareholders.
As Apple’s market cap approaches $1T, it begs the question; can shares move higher? At Loup Ventures we do believe the Apple story is well positioned for future appreciation based on a longer-term, more sustainable investing paradigm. The recent move higher in shares of AAPL is likely an early reflection of this emerging paradigm shift. Starting next week, we will publish a four-part series on each of these themes.
Apple investing paradigms. About every 10 years, there is a new paradigm that drives investor thinking on the Apple story. It started with the growth of the Mac (’80-’85), then post-Jobs and competition from the PC (’85-’97), then the iPod along with its halo effect which increased Mac market share (’01-’06), and most recently, the iPhone (’07-present). We define the next paradigm as Apple as a Service.
Drifting away from product cycle hype and disappointment. What will slowly go away (may take a couple years) in this new way of thinking is hype ahead of new product releases and the inevitable anxiety related to unit sales once a product ships. We still think anticipation around new products will influence shares, but that influence will be shorter-lived. For example, Apple will likely release a larger-screen along with a lower-priced iPhone this fall, which will be good for iPhone demand but unlikely to yield a super cycle (greater than 10% y/y iPhone unit growth). The Apple as a Service paradigm will not need a super cycle for the Apple story to remain favorable with investors.
Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.