Apple: India Is The Future After The Normal Economy Returns
Summary
- Apple has a huge potential growth avenue in India with the current ability to reasonably sell 15 million units.
- A return to a normal global economy is key to the investment thesis over the next year.
- My estimate is for a FY21 EPS boost to $17, making the $320 stock reasonably priced at 18.8x this target.
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As Apple (NASDAQ:AAPL) continues to struggle to grow in China due to government pressures, India is now opening as an option for huge growth over the next decade. The Indian government now appears far more friendly to the tech giant. My investment thesis isn't as bullish on the stock after the rebound to $320, but Apple remains a long-term buy on international growth and margin expansion.
Image Source: Apple website
Moving Into India
In the last few years, Apple has seen a decline in Chinese sales as the governments of the two countries battle over economic regulations. The one country offering the ability to replace stalling sales in China is India.
Apple just released the ability of Indian consumers to order customizable Macs and the company plans to open a retail store in 2021. The added sales capabilities in the Asian country should finally turn India into a growth driver for the tech giant.
Technically, India is the fifth largest economy now with a GDP of $2.65 trillion. The country has a GDP higher than the United Kingdom and France now. The per capita data, though, is still troubling for actual sales. Indian's only have an annual income of $1,980 in comparison to $39,532 in the U.K. while China consumers are up at $8,612.
Source: Worldometer
Clearly, the average consumer in India can't afford a normal $1,000 iPhone costing half the annual income of a family. Even the typical Chinese consumer can't afford an iPhone costing over 10% of their annual income, but this doesn't stop the country from generating $44 billion in FY19 sales. The number was down from $52 billion in FY18 sales.
Source: Apple FQ4'19 earnings release
JPMorgan analyst Samik Chatterjee sees a huge potential in Apple capturing half of the up to 35 million and growing Samsung (OTCPK:SSNLF) users in the country. Selling 15 million iPhones even starting at only $400 for the iPhone SE would add an additional $7 billion in annual revenues.
At about 22% of the GDP of China, India would generate about $11 billion in annual sales to match the per capita sales rate of China in FY18. One might argue that with reduced restrictions in India and a better ally with the U.S. government could lead to better outcomes for Apple in India than China.
With a population of 1.3 billion people, India would appear to have upside potential to 50 million or even 100 million iPhone units in the next decade as the wealth in the country grows.
Back To Normal
When the global economy normalizes in FY21 (starting October), analysts forecast Apple generating nearly $300 billion in annual sales. With Asia Pacific generating about $18 billion in annual sales last year, adding $7 billion or $11 billion in sales from India won't drive a huge boom for the tech giant. Adding several billion here and there and 20% annual growth will help at the margins.
The bigger immediate key is reopening stores as the coronavirus fears dissipate. Apple is starting to reopen stores around the globe. The company plans to reopen all stores in Japan on Wednesday and had reopened 130 stores in the U.S. prior the riots.
Analysts have the company earning nearly $15 in FY21, but the argument should exist for Apple to top the FY21 estimates from the end of February when the target was $15.69 per share. The 5G iPhone 12 is likely pushed into October cutting September sales and pent-up demand will exist heading into next year as consumers delay the replacement cycle due to current economic uncertainties.
Source: Seeking Alpha Earnings Revisions
My estimates from back in March had Apple generating $317 billion in FY21 revenues due to only a 3% boost from pent-up demand to previous FY21 revenue estimates of $308 billion. In a more normal economic climate, analysts should boost revenue estimates back to previous levels.
The key assumptions used in deriving the EPS estimate of nearly $17 for next year:
- Gross margins at 38.7% due to a Services boost.
- Diluted share count of 4.1 billion based on share buybacks reducing the share count by ~200 million per year.
- Operating expenses only grow minimally to $36 billion this year due to restricted business travel and spending and jump 10% in FY21 to reach $40 billion.
In this scenario, Apple generates a net income of ~$70 billion based on the general assumptions above. At $320, the tech giant trades at 18.8x some probably aggressive EPS estimates for FY21.
Another assumption is that the tech giant ends FY21 without a large cash balance to reduce the enterprise value. Even $60 billion only reduces the EV multiple to around 17.8x.
Takeaway
The key investor takeaway is that India provides another growth avenue for Apple in the next decade. The country has the ability to add up to $7 billion in iPhone sales, but the revenue impact is only a couple of percentage points with revenues topping $300 billion next year.
Apple trades at 18.8x FY21 EPS estimates based on a return to normal economic times. The tech giant continues to have a solid growth path over the next decade with the key to growth here being a strong FY21 from pent-up demand. Now isn't the time to get aggressive on the stock at the old highs, but investors should remember these growth drivers on the next dip in the stock.
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This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.
Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.Analyst’s Disclosure: I am/we are long AAPL. 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.
The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (58)
This article has nothing to due with covid19, it has everything to due with the global economy shifting business out of China. India won't be China for a decade, but India is a growth opportunity and Apple probably won't grow much in China due to govt pressure for citizens to buy Chinese products.
The stock dropped to $220. Are you complaining that I was right?
Yes, most people just don't understand the status symbol. Samsung has had comparable, if not better, phones for a long time, but most Americans don't want to be caught dead w/o an iPhone. Sounds like India is the same way for those with means to purchase one.
1) India's need for more manufacturing and employment
2) India and US relationsIndia does not need Apple phones and security does not matter for Indians. For those that need it, they will be using cheap non-smart phones for texting and calls. And home grown computers for emails.Stop reading forward if you think to ant-nationalist for a US citizen. But it is important to understand politics to understand future potential in India.US businesses must remember that the current generation of India and future generations of India are not the same as previous generations. They are more nationalist, they are not blindly loyal to Gandhi that screwed India but got away with total loyalty and they are reading revisionist history. So when the time comes to tell USA, UK and the west for their pre-Independence screwing of India and post-independence help to Pakistan and China's invasion of Tibet and claims of Indian territory that it claims its own as a result of its invasion of China.That said there is a risk but there is a huge potential as long as the US govt. does not start behaving like they own India. India will grow because its middle class is growing and US needs the market just like China. China will win if India takes a neutral position. US has an advantage in that China's commies think they are too powerful and think they will run all over India. They could beat India bad in a war but such a war would put India and China back 30 years. That 30 years place India ahead of China at the end. China may be too weak to control HK Taiwan and Tibet. India will bounce back faster with a 30% less population. Its cities decimated where it can be bulldozed and rebuilt. The cities are a mess anyway. Its nationalist movement will have one out with anti-Indian Muslims suffering poverty and Pakistan nuked and near empty.The world is going to go back to the days between the times of WW1 and WW2. There may be many flareups. Russia will keep out and fan the wars with sale of equipment and moral support at the UN but will probably not directly step in unless directly attacked like in WW2. The politics is the reason for the growth of US prospects in India and politics will decide how successful this will be and for how long.
Could've stopped after the first sentence... that's all the relationship needs. India has the opportunity to latch onto the technology sector via partnerships to leapfrog China, but if they become nationalists they will lose out remain a 3rd world economy.
1) For its markets
2) Neutralize China. See what good it did to Iran and Iraq.The risk: India did have a good relationship until it joined the Non-Aligned Movement and that upset the USA as it always wants nations to do what it is told. 3rd world is a concept. India just happens to have more slums than USA. Except that the Indian slums have people with rights and mentally sane. Also India's largest slum is a thriving economy larger than many nations with landmass that is 10 times larger.I watched India grow slowly. But grow each year with all its problems and even with Nixon and Kissinger telling Muslim Nations to go KILL INDIA. India kept its cool and focus on growth and never took that Nixon idiot personal. The growth in the last 10 years has been rapid and chaotic. And it is growing. And will continue to grow with the power of democracy and a mindset of peace.
$AAPL had to rely on 3rd party partners until recent rule changes. Unfortunately, they need far more than 1 store in the massive country, but its a start.
The experience is just fine with the reservation. Would you prefer to show up and wait?
seekingalpha.com/...
However I think he under-estimates the macro socio-economic problems India currently faces, and the micro problems Apple faces in their negotiations over retail and manufacturing in the country.These have dragged on interminably.
But that doesn't prevent Apple from selling a lot of units in India. Not to mention, the importance of Services is going to increasingly provide an incentive to lower phone prices for the recurring revenue stream.
i respect your research highly
But as an indigenous Indian,
FUGGGET-ABOUT-ITTTT!!Indians are extremely price conscious.
The top 1%‘tile are millionaires in $
And have already purchased the latest iphone on one of their 4 annual trips to the West.But the remainder will
NEVER PAY UP FOR THE 'CACHET' OF APPLE'S PREMIUM BRAND, WHEN SAMSUNG OR HUAWEI CAN PROVIDE BETTER SPECS FOR ABOUT HALF THE PRICESee these 2 articles, here on SA, for more detail on the India polarised income distribution and Indian Psyche'Buffett Should Sell Apple: First Trillion Bagged While Risks Mount'seekingalpha.com/..."Ebix: A Premier Indian Digital Wallet In The Making"
seekingalpha.com/...You're welcome
Sorry your comment was attached to a double post of mine but you referred to the growing middle class. Please check out the $ per capita income of the 40-50% Indian 'middle class'. Link above.
Remember not in PPP $, but nominal $ as apple price and components are $based.OK I had my say, Namaste.
My point and my article all take that into account. The point was the market for 35M Samsung phones that $AAPL can split. An Indian doesn't have to be a millionaire to buy an iPhone. Nobody has made any wild assumptions that Apple can access a large portion of this market as you seem to suggest was stated. As @stevefran mentions, Apple minds have it figured out. Don't think anybody thought 10 years ago that Apple would end up with a $50B+ sales opportunity in China.
Definitely a possible trade with the rest of the world wanting to shift out of a reliance on China. How are buying India?
The $INDA ETF hasn't gone anywhere since the start in 2012. Not a big fan of country ETFs, but maybe India is due for a breakout.
Yes, pretty much understood once building up the market. Local manufacturing is already part of the equation.
Well, hopefully the shift to India starts making some swift progress in the next few years. India would be wise to make it easy for American companies to work in their country.
