Monday May 15, 2023: $172.07 -($0.50) -(0.29%)
May 15, 2023 1:11:24 GMT -8
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Post by Dave on May 15, 2023 1:11:24 GMT -8
Good morning, it’s Monday and we have a green pre-market at +0.19% at this moment.
Apple: 1 Billion Paying Subscribers And Emerging Markets Focus
A long story that was worth reading. I was able to access it through readers mode.
Events Calendar:
Monday, May 15
Mitsubishi Financial Group (MUFG), Nu Holdings (NU), Ryanair Holdings (RYAAY), XP Inc. (XP), and Catalent (CTLT) report earnings
NY Empire State Manufacturing Index (May)
Monday, May 15
Mitsubishi Financial Group (MUFG), Nu Holdings (NU), Ryanair Holdings (RYAAY), XP Inc. (XP), and Catalent (CTLT) report earnings
NY Empire State Manufacturing Index (May)
Apple: 1 Billion Paying Subscribers And Emerging Markets Focus
Traffic Acquisition Costs - The Most Important "Service"
Another important topic to discuss under services is traffic acquisition costs (TAC). For some reason, I saw that some market participants project TAC to decrease. Now, I'm not sure whether that was aimed at making headlines, or that was an actual projection, but I have to say I have the utmost certainty TAC is only going to increase, specifically due to the reignition of the search wars between Alphabet's Google (GOOG) and Microsoft.
According to most estimates, Google pays Apple around $17.5B per year for the right to be the default search engine on Apple's devices. The most quoted analysis was made by Goldman Sachs, which estimated the number at $9.5B in 2018, a year that Google's total TAC amounted to $26.7B. So, 35.5% of Google's TAC, which amounted to $48.9B in 2022, means $17.4B that Apple received from the search giant for that year. With more than 1 billion active iPhones, this "real estate" is one of the most expensive properties in the world. As we're already hearing about Microsoft eyeing a Firefox search deal, it would be a shocker if Apple wouldn't exploit this situation to its advantage.
With so much going in its favor, and because FX, gaming, and ads are all temporary headwinds that should start to ease already in the second half of the fiscal year, I project Apple's service revenues will see growth accelerate in the very near term.
Updated Valuation
I used a discounted cash flow methodology to evaluate Apple's fair value. I forecast Apple will grow revenues at a 5.9% CAGR between 2023-2030, based on steady growth in the company's core operations, and accelerated growth in emerging markets and services. My projection is in line with the consensus but significantly below Apple's past 7-year CAGR of 10.6%.
I project EBITDA margins will increase incrementally up to 34.8% in 2030, as the services portion of total revenues continues to grow. I find this projection conservative, as the company achieved a 33.1% EBITDA margin in 2022, a year in which it had a 43.3% gross margin, which is 1.2% below management's guidance for 2023. Thus, I believe the company is already capable of a margin that is around 34.3%.
Overall, my assumptions result in EBITDA growth slightly above revenue growth, reflecting operational leverage and a better mix.
Created and calculated by the author based on data from Apple's financial reports and the author's projections
Taking a WACC of 7.2%, I estimate Apple's fair value at $192 per share, which represents an 11.1% upside compared to the market price at the time of writing. This valuation reflects an arguably high forward P/E multiple of 24.9 based on my EPS projection for 2024. However, today's Apple isn't the old Apple. Its historical average P/E ratio reflects a product company, whereas the services side of the business is becoming increasingly important. Additionally, I expect 2024 will be a remarkable year for the company, as it will have easier comparisons and temporary headwinds should evaporate.
Conclusion
Apple's unstoppable ecosystem continued to gain strength in Q2-23, with over 2 billion active devices, above 1 billion active iPhones, and 975 million paid subscribers. Time and time again, Apple bears find their claims defeated by the world's largest company. As Apple constantly expands its offerings, the company is staying true to its strategy. Each and every product and service should add value to the other, and each and every product and service should be accretive to the company's profits. For these reasons, I reiterate a Buy rating and raise my price target to $192 per share.
Another important topic to discuss under services is traffic acquisition costs (TAC). For some reason, I saw that some market participants project TAC to decrease. Now, I'm not sure whether that was aimed at making headlines, or that was an actual projection, but I have to say I have the utmost certainty TAC is only going to increase, specifically due to the reignition of the search wars between Alphabet's Google (GOOG) and Microsoft.
According to most estimates, Google pays Apple around $17.5B per year for the right to be the default search engine on Apple's devices. The most quoted analysis was made by Goldman Sachs, which estimated the number at $9.5B in 2018, a year that Google's total TAC amounted to $26.7B. So, 35.5% of Google's TAC, which amounted to $48.9B in 2022, means $17.4B that Apple received from the search giant for that year. With more than 1 billion active iPhones, this "real estate" is one of the most expensive properties in the world. As we're already hearing about Microsoft eyeing a Firefox search deal, it would be a shocker if Apple wouldn't exploit this situation to its advantage.
With so much going in its favor, and because FX, gaming, and ads are all temporary headwinds that should start to ease already in the second half of the fiscal year, I project Apple's service revenues will see growth accelerate in the very near term.
Updated Valuation
I used a discounted cash flow methodology to evaluate Apple's fair value. I forecast Apple will grow revenues at a 5.9% CAGR between 2023-2030, based on steady growth in the company's core operations, and accelerated growth in emerging markets and services. My projection is in line with the consensus but significantly below Apple's past 7-year CAGR of 10.6%.
I project EBITDA margins will increase incrementally up to 34.8% in 2030, as the services portion of total revenues continues to grow. I find this projection conservative, as the company achieved a 33.1% EBITDA margin in 2022, a year in which it had a 43.3% gross margin, which is 1.2% below management's guidance for 2023. Thus, I believe the company is already capable of a margin that is around 34.3%.
Overall, my assumptions result in EBITDA growth slightly above revenue growth, reflecting operational leverage and a better mix.
Created and calculated by the author based on data from Apple's financial reports and the author's projections
Taking a WACC of 7.2%, I estimate Apple's fair value at $192 per share, which represents an 11.1% upside compared to the market price at the time of writing. This valuation reflects an arguably high forward P/E multiple of 24.9 based on my EPS projection for 2024. However, today's Apple isn't the old Apple. Its historical average P/E ratio reflects a product company, whereas the services side of the business is becoming increasingly important. Additionally, I expect 2024 will be a remarkable year for the company, as it will have easier comparisons and temporary headwinds should evaporate.
Conclusion
Apple's unstoppable ecosystem continued to gain strength in Q2-23, with over 2 billion active devices, above 1 billion active iPhones, and 975 million paid subscribers. Time and time again, Apple bears find their claims defeated by the world's largest company. As Apple constantly expands its offerings, the company is staying true to its strategy. Each and every product and service should add value to the other, and each and every product and service should be accretive to the company's profits. For these reasons, I reiterate a Buy rating and raise my price target to $192 per share.
A long story that was worth reading. I was able to access it through readers mode.