In today's Oxen Group recap, we will be looking at Apple (AAPL) in our daily deeper look. We want to update our Apple 12-month price target as 2014 starts to line up for AAPL. The Oxen Group covers both companies year round, and we want to update our current pricing to reflect recent occurrences. Additionally, as always, we will do our typical market overview, important news breakdown, and give our perspective on what's moving the market.
Today, we are taking a look at Apple. For as long as we can remember, we have been fans of this company as well as the stock. The stock, though, is one of the most intricate and challenging names to understand out there. On paper, the company looks to be worth quite a lot more than what it is trading for, but in the real world, there are factors about Apple that cannot fit into a model given that it is one of the most widely talked about and invested companies in the world.
Coming into today, we had a Buy-rating with an $855 price tag. Based on our updated model, we are now seeing shares worth $700 over the next twelve months. The main factors for this change are that we believe that we cannot price Apple in the same way we price other names and need to price it in its own specific way.
The industry (tablets, mobile phones, and notebooks), which Apple in many ways has defined many of the standards for, is as robust and healthy as it has ever been. The shift to mobile phones and tablets away from PCs is one of the biggest reasons that Apple has been so successful and why they will maintain that position.
Here are some statistics on this migration:
- Tablet sales are expected to grow 22% in 2014 to 270.5M units.
- oebook sales are expected to drop 7-8% in 2014
- By Q2 of 2014, tablets will likely outsell PCs with potentially 67-68M units
- Mobile phones will grow in shipments by 5% in 2014.
- Mobile phones will push to 1.9B units and over 2B in 2015
What we are seeing is that there is a major demand for tablets and phones over PCs. This information is not new by any means, but we like to put it out there because understanding those numbers in congruence with understanding Apple's market share can help us to value out the company for where it should be pricing.
In this section, we want to breakdown what are the main catalysts for 2014, and what investors will focus in on to determine if Apple can make a comeback in 2014 or if it will take on the Microsoft mired in ranges for years approach. The three main catalysts we will be looking at are: new iPad and iPhone models, iOS in the car, and Apple TV.
Let's start with the new iPad and iPhone. 2014 should be a revolution for the iPhone. After several models advanced slowly, many are looking to the iPhone 6 to really push the envelope once again. The confirmed push is for bigger screens on the iPhone 6 that will push the overall size of the phone even further, but we would not expect a drastically "big" phone, as they'll try to make the screen push from side-to-side. Another likely development will be continued push on processors. The A7 64-bit chip was a major upgrade, and it is hard to expect much more from there. The areas where the company could make hay and where a lot of investors will be watching are the battery, iBeacons, facial recognition, camera advancements, and motion sensing.
The company's acquisition of PrimeSense, a motion sensor company, could be a big development on the technology side to allow for facial recognition, hand gesturing to do a lot of tasks, and more. One of the biggest knocks on the iPhone has been the battery life; so improving that to 24 hours would be a big win. Finally, Apple kills Samsung on its camera, but the latter is closing the gap. An upgraded 12megapixel camera would do wonders to hush any naysayers.
On the iPad side, the company is likely to release a new model in early 2014. Expectations are that the company will build a supersized iPad that is around 13in, which pushes the question even further as to what is the use of notebooks. Additionally, the new iPad will get a processor upgrade to at least the A7 and likely get some other bells and whistles that the iPhone 5S.
Another major development was the China Mobile deal today (CHL), which we will cover more in the pricing/valuation section.
The second main catalyst we will be watching for is iOS in the car. Pandora (P), SiriusXM (SIRI), and navigation companies have done amazing with their installations directly into automobiles. It makes sense for Apple though. They have navigation, phone capabilities, music, email, and everything a person would want to have in their car. There are a ton of companies lined up to get iOS in the Car rolling in 2014 with Honda, BMW, Toyota, Nissan, Jaguar, GM, Land Rover, Chrysler, Kia, Volvo, Audi, Ferrari, Hyundai, Opel, and Acura. Wow! How will Apple make money off of this venture?
The key is not in licensing. The details on that revenue are scarce. The key is in the use of phones and the ability to have your iPhone capabilities in your car. So, while you are driving, you can listen to iTunes Radio. You like a song along the way and buy it. You are more likely to buy an iPhone because every car connects to it and not Android. You will use the navigation system, which Apple can make money on through the companies that place themselves on Apple Maps. What it does is pushes how much you use iOS and Apple products even further, and it can be a significant revenue source.
Finally, the most hotly anticipated development in Apple history that has never happened still…Apple TV. 2014 looks to be the year for the company. Here is Ming-Chi Kuo speaking about the prospects:
We expect Apple to launch a new version of the Apple TV with an A7 processor in 2014, and we forecast 2014 shipments to total 8.2mn units. Shipment growth will be limited unless Apple is able to integrate more TV content, services and its App Store, in our view. We believe the slowdown in Apple TV shipments suggests Apple faces challenges in integrating TV content and services. If Apple wants to launch iTV, the challenges of integrating content and service are more difficult considering the different TV content ecosystems (e.g. cable operators) in various countries. Moreover, establishing an iTV supply chain is very costly. Thus we believe iTV launch will be delayed to end-2015 or early 2016 at the earliest.
So, we get a new Apple TV system but not the iTV that everyone wants. The new system should get some buzz, but without iTV, it still is not a homerun.
There is a lot happening in 2014, so let's take a look at how to digest all of this to get an accurate idea of where the stock could go as far as pricing.
Revenue - The company currently has market share at 13% in mobile shipments and 30% in tablets. How will these shares develop in 2014? We would expect mobile to jump again. The catalysts we mentioned are going to be winners for AAPL, and the company also just inked a deal with China Mobile. Both of these give Apple some definite upside in market share. Now, the competition is strong, but we would say a jump to 15-17% is likely. Tablet market share will likely be flat as we expect better competition in 2014 especially from MSFT. Even so, that puts potential volume at 220M phones sold and 79M tablets sold. With an average sale price of roughly $600 per phone and $440 per tablet (which are likely low given the premium iPhone 6 and new iPad will likely reverse ASP back up), revenue from these products is likely to be $132B and $35B, putting revenue at $167B for these products alone.
How much can the rest of the business make?
PC sales are likely to decline, and we should see around $15B in Mac sales. The iPod will likely come in around $500M. iTunes will be on the rise with the launch iTunes Radio as well as the implementation into phones, so we could see that at $18B. Finally accessories should pitch in around $5B. We are looking at potentially $205B in sales. Some may say these numbers are lofty, but given the growth of the smartphone market and launch of iPhone 6 it will push sales to that area. Tablet sales are going to be strong. The one area that may decline further is Mac, but even in a most conservative approach - $200B looks possible in 2014.
If we use that number, and we take a net margin of 22% (accounting for a jump back up due to rising ASPs), we can see net income coming in at $44B, which translates to an EPS of 48.90. In this best-case scenario, we then take 48.90 x current PE of 14.3, and we get share price at $700. In a more conservative model, if we see AAPL lose market share in both phones and tablets and see net margin drop to 20%, we are looking at 200M phones and 65M tablets. In that scenario, revenue would be around $180B with net income at $36B and an EPS of 40.04. Multiplying that by current PE, we get share prices at $575 around current pricing.
These estimates, though, are just too low. The company is not going to see net margin decrease to 20% with new premium products out, and they are unlikely to lose that much market share. The only way that happens is if the company completely flops on these products, and that has not happened. Expectations of something between $575-$700 for next year is a conservative yet likely scenario
A whole week of down days is leading up to a crucial Friday when we get nonfarm payrolls and the unemployment rate. After ADP Employment and initial jobless claims were very solid this week, the expectations for NFP have been on the rise with most calling for a 225-250K rise. The issue has been, though, that most have seen good jobs data as bad for Fed taper prolonging. The market will definitely be ready to react tomorrow, and we may rise on a disappointment or very strong number that is unexpected. Look for the Dow Jones (DIA) and S&P 500 (SPY) to get moving again if we get a very solid report.