Apple closed above $100 on Thursday and Friday for the first time since April 26, the day that the company announced its March quarter results. It’s closing low since then was $90.34 on May 12 and the share have rebounded 11%. I’ve outlined three bull and bear cases that give plenty fuel to each position along with one more thought on the company’s cash. (Note that I own Apple shares).
Apple Bull cases
The first Bull case revolves around the iPhone 7 which will probably be released in the September timeframe. This would be the sixth iPhone Apple will have launched entering the holiday quarter and while some iPhone 6’s that were bought two years ago will upgrade to the iPhone 7 its sales will be driven by upgrades from smaller screen iPhones such as the iPhone 4S, 5, 5c and 5s and Android switchers. While it won’t have the same impact as the iPhone 6 two years ago if the 7 can at least stabilize year over year growth if not get it back to mid-single digits the stock will respond positively.
The second Bull case is that the iPhone install base continues to grow which drives future iPhone sales. iPhone’s have very high loyalty rates (partially due to the lock-in a user has when they get used to Apple’s software) and when combined with the lower priced iPhone SE this trend should continue.
Source: Apple
The third Bull case is the iPhone and other Apple products install bases create an annuity business model. The company disclosed on the January financial results conference call that over 1 billion Apple devices had engaged with the company’s services in the past 90 days. For the first half of fiscal 2016 it’s Services revenue were 10% of total revenue and grew 23% year over year.
Source: Apple
Apple Bear cases
The first Bear case is that iPhone units were down 16% in the March quarter and should decrease by about the same amount in the June quarter. That overall the smartphone market is saturated and the there isn’t enough additional functionality in the iPhone 7 to generate growth.
The second Bear case is that Apple’s gross margins are declining. They have fallen from 40.1% in the December quarter to 39.4% in the March quarter and June quarter guidance is 37.5% to 38.0%. They also won’t be helped as the lower priced iPhone SE becomes more popular.
The third Bear case is that new products have not had much of an impact and that there isn’t anything on the horizon to move the financial needle. While the Watch has probably sold over 10 million units in its first year that overall is has accounted for about 2% to 3% of total company revenue and is viewed at best as having an lackluster launch.
The balance sheet and valuation provide support
Apple has $153 billion in net cash per share after subtracting its debt and when I assume paying the additional taxes to bring back the international cash to the US and set aside $20 billion to run the business that it has $19 in net cash per share.
The stock trades at a 12x PE multiple on fiscal 2016’s Street EPS estimate of $8.28 and 11x on fiscal 2017’s $9.13 projection. When the $19 in net cash is taken into account the shares are at a 10x and 9x PE multiple for fiscal 2016 and 2017, respectively.
