Here's Why Apple Is Poised To Outperform

Summary

• Apple's higher-end iPhone X device is set to drive its top line growth in FY 2018.
• Apple's payment solution Apple Pay to surpass PayPal in North American digital payment space by 2017.
• Apple to create its first television project of Spielberg’s NBC anthology series “Amazing Stories”.

Cupertino-based Apple (NASDAQ: NASDAQ:AAPL) has a long history of topping Wall Street estimates and the iPhone maker is set to repeat it after the closing bell today. According to Zacks Equity Research, the iPhone maker is expected to earn $1.86 per share on revenues of $51.2bn in the fiscal fourth-quarter 2017, up from $1.66 per share on $46.6bn in the year-earlier period. iPhone shipments, which constitutes between 60% and 65% of Apple’s sales, are projected to reach 46.4 million units in the fiscal fourth-quarter 2017, backed by accelerating sales of iPhone in China. This represents a 2.1% increase from 45.5 million units shipped in the year-earlier period.

While iPhone continues to be the major driver of its top line, Apple’s services segment consisting of App Store, Apple Music, Apple Pay and other services has become a major growth catalyst with over 185 million subscribers. With the release of iOS 11, the company expects to pull in more revenues from its App Store during the quarter. Revenues from iTunes, software and services are expected to be $7.6bn in the fiscal fourth-quarter 2017, up a staggering 20.4% from last year. Additionally, Apple is witnessing strong demand for iPad among schools driven by the wide range of multimedia features of iOS applications focused on the education sector. For the fiscal fourth-quarter 2017, iPad shipments are expected to reach about 10 million units, up 7.4% from the last year.

Apple shares have also recovered from the jolt following the latest iPhone announcement in Sep’17, but there is plenty of uncertainty about the market outlook for its high-end iPhone X. The stock has jumped about 45.5% in the year-to-date period (see the chart below), outperforming industry peers IBM (NYSE: IBM), HP (NYSE: HPQ), Google (NASDAQ: (GOOG) (GOOGL) and Microsoft (NASDAQ: MSFT). This strong year-to-date performance notwithstanding, the stock has broadly lagged Samsung Electronics (OTC: OTCPK:SSNLF), Sony (NYSE: SNE) and Dell Technologies (NYSE: DVMT). Apple’s stock currently trades at around $169.1 with a market capitalization of $861.2bn.

Source: Morningstar

Now, let’s dig a little deeper to see how Apple is gearing up to improve its top line and why investors should care.

Like every year, Apple has launched two new iteration of its flagship device – iPhone 8 and iPhone 8 Plus – in September, however the much coveted tenth anniversary edition, iPhone X, is slated to hit the market later this week. Although Apple is reportedly constrained on the supply of iPhone X due to production problems, the company is targeting to ship 20 million units (approximately half of the original estimate) having an average selling price of $1,074 by the end of 2017 – this would generate about $21.5bn in revenues. It is believed that high-end iPhone 8, 8 Plus and iPhone X will help Apple to cushion the topline in the face of lower volume growth as well as boost gross margins in the fiscal first-quarter 2018.

To be clear, Apple won't generate as much revenue as it potentially could have during this quarter, but the company still has three more quarters to get iPhone X devices into people's hands in 2018. The pricing of its latest iPhone editions reflects Apple’s continuing focus on maintaining its premium brand image. Apple currently has 500 retail stores with over 500 million store visitors per year, and the company is expected to succeed with its high-end retail store experience in 2018. Additionally, Apple has been offering big discounts on iPhone 7 and iPhone 7 Plus models in rapidly growing, cost-conscious markets like India and China to gain market share against Samsung, Huawei, Oppo, Vivo and Xiaomi.

Last month, the tech giant also signed a deal with Steven Spielberg's Amblin Entertainment and NBC Universal to reproduce 10 episodes of Spielberg's 1980s cult sci-fi series Amazing Stories. It is now evident that Apple is entering into the media content industry to compete with the rival streaming giants Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN). As part of its new media ambitions, the company has ambitious plans to spend around $1bn for the creation of dramatic contents. Ex-Sony Pictures Television executives Zack Van Amburg and Jamie Erlicht, who were hired by Apple in June this year, will lead the Apple’s new content venture.

The iPhone maker is also giving stiff competition to the online payment giant PayPal (NASDAQ: PYPL) in the digital payment space. According to a new research from Boston Retail Partners, 36% of North American retailers are accepting Apple Pay, more than any other payment method, and another 22% plan to accept the Apple's payment solution within the next 12 months. On the other hand, PayPal is currently being accepted at about one-third of North American retailers, and that is expected to rise to more than half within the next year – yet still short to take the No. 1 spot. Total transaction value of US digital payments is forecast to hit $738.3bn in 2017 and is expected to grow at an annual rate of 12.8% to reach $1,194.4bn by the end of 2021.

Source: Statista

In its third-quarter earnings call, Apple's CFO, Luca Maestri, said, "Apple Pay is by far the No. 1 NFC (near-field communication) payment service on mobile devices, with nearly 90% of all transactions globally.” In order to drive further growth, Apple has also launched a new feature, Apple Pay Cash, to compete directly with PayPal's Venmo in the person-to-person payments space. Apple's CEO Tim Cook aims to double the revenues from its services business by the end of 2020. Interestingly, services revenue also increased by 22% year-over-year to $7.3bn in the previous quarter.

The Bottom Line

Apple and its suppliers are working tirelessly to manufacture defect-free components for the front-facing TrueDepth camera system to avoid any potential iPhone production shortfall in the upcoming quarters. Moreover, the company is reportedly planning to use this technology in its next-generation iPad. The iPhone maker, on average, is expected to generate $85.9bn in revenues in the fiscal first-quarter of fiscal 2018, representing year-on-year growth of 9.7%, despite issues with iPhone X.

Apple shares are currently trading at an average P/E multiple of 19.1, in line with the industry peer group. In addition, higher-end iPhone X is likely to boost margins if Apple meets the demand for its innovative iPhone X devices in the upcoming quarters. If we look at the metrics below, Apple’s fundamentals are relatively much better than its industry peer group. Considering its huge earnings growth potential, investors should be willing to pay higher price for more and more Apple.

Source: Morningstar

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.