Will iPhone X knit Apple a trillion-dollar market cap?

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Will iPhone X knit Apple a trillion-dollar market cap?
You'd wonder: how many of those who attended the iPhone X launch know what it could mean for Apple.

Published: Sun 17 Sep 2017, 10:48 PM

Last updated: Mon 18 Sep 2017, 12:49 AM

The launch of the iPhone X was the biggest event in Silicon Valley and the most awaited new product offering from the colossus of Cupertino since at least 2013. However, Apple shares are up 40 per cent since December 2016 and even sleek Apple TV streaming video boxes and LTE enabled watch were not enough to scale new highs above 163 after CEO Tim Cook unveiled the new Apple devices. A decade after the launch of the iPhone changed the nature of human communications on a planetary scale, it is an opportune moment to analyse the investment potential for Apple shares.
The investment case for Apple is still not over as the global iPhone upgrade cycle accelerates and Wall Street prices in secular growth in service revenues. The other catalysts for Apple is its stock buyback program, its valuation discount relative to its FANG peers and innovation based, artificial intelligence software intensive new product pipeline. As the iPhone X demonstrates, Apple has ushered in a brave new world of 3D sensors, cameras and augmented reality technologies. In any case, the global excitement about these new features/technologies will tilt Apple's product mix towards the higher end $999 phone, making the next iPhone cycle a financial windfall for the company. The cellular enabled Watch and Apple TV are only an icing on the cake for fiscal 2018 revenue growth. Apple is still not expensive at 15 times forward consensus earnings estimates though the Street sell side consensus reflects inflated expectations for iPhone unit growth and average sales prices.
iPhone sales are 64 per cent of Apple's 2016 sales, with the rest from services (iCloud, Apple Care, store sales). Apple's third-quarter results and guidance were both impressive - with three to six per cent unit growth in iPhone 7, Mac and iPad sales, and 21.6 per cent services revenue growth on the App Store. Services is a proven growth segment in Apple and is a hedge against any slowdown in the global smartphone market, with the App Store the segment's growth engine. Apple pay, Apple Music and CarPlay are all services killer apps, as is original video content. Ultimately, hardware is 82 per cent of Apple revenues (iPhone, iPad, Mac) but its future will be dominated by the explosive growth in services over the next decade.
Apple needs to trade at 194 to become Silicon Valley's first trillion-dollar value business. Will it trade at this milestone sometime in 2018? Absolutely. Yet I would not be surprised to see a short-term, profit-taking correction. I expect Apple's buy/sell range to be 140-170 for the rest of 2017. Apart from competitive and regulatory risk, I believe production constraints and switching trends could disappoint investors and enable, optimal entry strategies.
Semiconductor chip makers Intel and Qualcomm supply wireless modem chips for the iPhone. Qualcomm supplies the baseband for the CDMA version of the iPhone while Intel supplies the baseband to the GSM version. Given the critical role of CDMA networks such as Sprint, Verizon, NTT Docomo or China Telecom, I expect Qualcomm to be a relative beneficiary of the new iPhone paradigm. However, Qualcomm is in a steep downtrend and I am frankly enable to evaluate the outcome of its legal woes.
The November 3 shipment date of the iPhone X means that Wall Street may have to revise its 85 million estimated unit sales to spill over into 2018, the reason Apple shares sagged to $158 after the Cupertino event. Yet it makes intuitive sense that Apple's higher end product mix means that Wall Street tech analysts will continue to raise their average selling price of the iPhone. So the late shipment date of the iPhone X does not at all negate the bullish case for Apple. Yet it is inevitable that Apple has done its best to nudge iPhone customers to higher priced products and stimulate global demand for iPhone X, whose shipments will ramp up nest year and ensure that Apple achieves a trillion dollar market cap. Losers from the new Apple iPhone? Western Digital and T-Mobile. Margin pressure could also hit Taiwan's Hon Hai Precision and LG Innotek. The winners? Optical firms in Hong Kong and Germany that supply 3D sensors to Cupertino, Micron and Samsung Electronics.

By Matein Khalid

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