Apple stock: iPhone subscriptions could be massive (NASDAQ: AAPL)


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Investment thesis

Apple Inc. (NASDAQ: AAPL) was considering a hardware subscription service for its product suite. So naturally, the focus is on its flagship iPhone segment. Nevertheless, nothing has been confirmed and plans could continue to be made or even blocked.

However, we believe this could mark an important pivot in Apple’s strategy to further reach Android’s (GOOGL) (GOOG) installed base. Apple’s 5G launches, starting with the iPhone 12, have been hugely successful in the US and China. Moreover, the iPhone 13 continued its massive momentum. Recent supply chain audits also found it was beating estimates, despite the transitional shutdown of its main contract manufacturer Foxconn (OTCPK:HNHAF).

We explain why hardware/iPhone subscriptions could be a game-changer. We are also maintaining our buy rating on AAPL shares. But, we’ve seen a robust recovery from its March low, and its price action doesn’t look ideal for adding exposure.

Therefore, if you are not in a rush, you might consider waiting for the recent spike to be digested before adding it.

Key measures of AAPL actions

Valuation of the AAPL NTM EBIT share

AAPL NTM EBIT (TIKR) stock valuation

Consensus price targets for AAPL shares Vs. stock market performance

Consensus price targets for AAPL shares Vs. stock market performance (TIKR)

AAPL’s EBIT NTM multiple of 22.9x trades ahead of its 3-year EBIT NTM average of 20.2x. Thus, AAPL stock has moved away from the 20x multiple that has supported its stock over the past year.

Furthermore, the stock has also advanced well beyond its most conservative price targets ((PT)) as shown above. His most conservative PTs have been robust support levels for AAPL stocks over time. Therefore, we believe the current buy zone is not ideal if you are looking to add exposure. But, if you’re not concerned about short-term volatility, its stock is still not significantly overvalued.

Additionally, we think Apple has several options that could cause the street to reassess its stock. These include its Apple Car project, its booming services segment and its rapidly growing advertising business.

Why Apple’s iPhone subscriptions could be a game-changer

Bloomberg reported that Apple is considering a subscription service for its hardware, including its iconic iPhone. Therefore, subscribers would only have to pay a monthly fee. Apple would administer the program through a subscriber’s Apple Account, the same way they subscribed to other Apple services.

Notably, it is different from its current installment programs. Bloomberg noted (edited): “The monthly fee would not be the price of the device spread over 12 or 24 months. Rather, it would be a TBD monthly fee that depends on the device chosen by the user.”

We think this could be a notable development in Apple’s services strategy. Apple has made progress in monetizing its huge active installed hardware base which has exceeded 1.65 billion. Of these, he said 785 million signed up as subscribers to his suite of services in FQ1’22 (CQ4’21).

Apple’s leadership in high-end smartphones has undoubtedly helped it extend its lead in its segment. For example, Counterpoint Research pointed out that Apple continued to expand its market share in the premium segment in China. This accentuated the fact that Apple captured 63.5% of the premium segment’s share in 2021, compared to 55.4% in 2020. Consequently, Apple capitalized on Huawei’s demise with incredible “ruthlessness”, despite the best efforts of its Chinese smartphone rivals.

However, according to StatCounter, Android remains the most important mobile operating system in the world, with a device share of 71%. Therefore, it is clear that most users are still equipped with much cheaper Android phones, and Apple has not yet penetrated this segment.

While the $429 iPhone SE 5G is promising, the street has forecast roughly 30 million units this year. Additionally, DIGTIMES also reported that Apple shipped around 25-30 million units of its previous iPhone SE in 2020 in its first year of release. Additionally, Counterpoint Research also pointed out that it accounts for approximately “12% of Apple’s total iPhone sales from its launch in Q2 2020 through Q4 2021 – with Japan and the United States being the largest markets for the device worldwide”.

Therefore, if Apple wants to establish itself in the low-to-mid segment and gain market share against Android, a subscription service makes perfect sense. The penetration rate of 5G smartphones in China has already reached around 80%. But opportunities in the rest of Asia and Europe could hold huge potential for Apple. Notably, Apple needs to make its iPhone more affordable without eating into its precious margins. Bloomberg’s Mark Gurman even suggested that Apple launch a $199 5G iPhone SE to more effectively penetrate the low-to-mid segment ahead of its Peek Performance event in March. He pointed out (edited):

A device priced at $200 could make inroads in regions like Africa, South America, and parts of Asia that are currently Android strongholds.

This would allow Apple enroll more customers for services, potentially making a low-end iPhone quite lucrative for Apple in the long run. But so far, the company has steered clear of this approach.

In 2013, when carrier subsidies began to disappear and demand for a lower-cost iPhone grew, Apple executives said they wouldn’t release a cheap model just to blindly chase market share. . It released the low-end SE in 2016, but the phone cost $399 – well above the level of many Androids – and the price never dropped for the next five years. The company has remained true to Steve Jobs’ “do not ship garbage” philosophy. -Bloomberg

Moreover, the 5G upgrade cycle is still in its early stages and is rapidly being adopted. Counterpoint Research also pointed out in a recent note that the global penetration of 5G smartphones surpassed 4G for the first time in January 2022.

Therefore, Apple has a huge opportunity to leverage this 5G wave to encourage switches from Android to iOS. Therefore, we believe that a hardware subscription strategy could be massive for the Cupertino company to boost the adoption of its 5G devices.

We believe that Apple can continue to innovate and introduce effective ideas to conquer the segment that Android has traditionally dominated without necessarily sacrificing brand equity and margins.

Is AAPL stock a buy, sell or hold?

AAPL stock is slightly overvalued, but not by much. Therefore, if you need a higher headroom, you can consider getting a 10-15% haircut.

Alternatively, if you are a firm believer in Apple’s ability to execute, the current price could provide a suitable opportunity to increase exposure.

Additionally, we believe Apple has several options that have not been factored into its stock price. And the potential hardware subscription strategy adds to its growing list of monetization potential.

As such, we reiterate our buy rating on AAPL stock.


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