- 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.
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.
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.
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