Apple: We Have Reached Peak Valuation (Rating Downgrade)

Summary:

  • iPhone revenue dropped by 2.4% in 2023 due to declining shipments, but we expect Apple Inc. to continue capitalizing on the premium smartphone market moving forward.
  • We believe Apple has reached peak operational efficiency, which does not leave room for further margin expansion.
  • While Apple’s consistent share buybacks could unlock around 4.3% of value per year, our comprehensive discounted cash flow valuation still indicates the stock price has reached its price target.

Apple Store at 5th Ave in Manhattan, New York City

ozgurdonmaz

In our previous analysis of Apple Inc. (NASDAQ:AAPL), we analyzed the smartphone market, projecting a -2.8% growth due to slow penetration rates and a global decrease in replacement rates. Despite this, we believed Apple was strategically positioned to thrive in the

Apple Revenue Segments ($ bln)

Actual (2023)

Our Previous Forecast (2024F)

iPhone

200.6

208.8

Growth %

-2.39%

4.10%

Mac

29.4

40.3

Growth %

-26.94%

37.30%

iPad

28.3

32.7

Growth %

-3.38%

15.70%

Wearables, home and accessories

39.8

45.3

Growth %

-3.36%

13.60%

Services

85.2

104.6

Growth %

9.05%

22.80%

Total

383.3

431.7

Total Growth %

-2.80%

12.64%

Company

Notebook

Desktop

Average PassMark CPU Score

Intel Corporation (INTC)

33,585

38,862

36,224

Advanced Micro Devices, Inc. (AMD)

21,466

45,367

33,417

Apple Inc.

29,397

29,397

29,397

Apple Services Forecast ($ mln)

2021

2022

2023

2024F

2025F

2026F

Our Previous Forecast Average

Our New Forecast Average

App Store

19,148

19,530

20,025

22,995

26,410

30,337

Growth %

2.0%

2.5%

14.8%

14.9%

14.9%

23.4%

14.9%

Apple Music

8,488

9,337

11,646

13,023

14,566

16,294

Growth %

10.0%

24.7%

11.8%

11.8%

11.9%

44.1%

11.8%

Apple TV

1,497

2,339

4,422

5,574

6,747

7,956

Growth %

56.3%

89.1%

26.0%

21.0%

17.9%

27.5%

21.7%

Apple News+

1,424

1,319

1,470

1,638

1,826

2,036

Growth %

-7.4%

11.4%

11.5%

11.5%

11.5%

18.3%

11.5%

Other Services Revenue

37,870

45,605

47,637

52,344

57,524

63,228

Growth %

20.4%

4.5%

9.9%

9.9%

9.9%

8.7%

9.9%

Total Service Revenue

68,427

78,130

85,200

95,574

107,074

119,851

Growth %

14.2%

9.0%

12.2%

12.0%

11.9%

22.9%

12.0%

Our Previous Forecast

22.8%

22.7%

23.0%

Apple Revenue Projections ($ mln)

2023

2024F

2025F

2026F

Our Previous Forecast (2024F)

iPhone

200.6

213.38

227.00

241.48

208.8

Growth %

-2.4%

6.4%

6.4%

6.4%

4.10%

Mac

29.4

34.50

36.69

37.06

40.3

Growth %

-26.9%

17.5%

6.3%

1.0%

37.30%

iPad

28.3

27.20

26.14

25.13

32.7

Growth %

-3.4%

-3.9%

-3.9%

-3.9%

15.70%

Wearables, home and accessories

39.8

44.03

48.50

53.25

45.3

Growth %

-3.4%

10.5%

10.2%

9.8%

13.60%

Services

85.2

95.57

107.07

119.85

104.6

Growth %

9.0%

12.2%

12.0%

11.9%

22.80%

Total

383.3

414.7

445.4

476.8

431.7

Total Growth %

-2.8%

8.2%

7.4%

7.0%

12.64%

Expense Analysis (% of Revenue)

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Average

COGS (excluding D&A)

57.1%

55.1%

56.1%

57.1%

57.6%

57.4%

57.7%

55.1%

53.9%

52.9%

56.0%

Depreciation & Amortization

4.3%

4.8%

4.9%

4.4%

4.1%

4.8%

4.0%

3.1%

2.8%

3.0%

4.0%

Gross Profit

38.6%

40.1%

39.1%

38.5%

38.3%

37.8%

38.2%

41.8%

43.3%

44.1%

40.0%

Research and development

3.3%

3.5%

4.7%

5.1%

5.4%

6.2%

6.8%

6.0%

6.7%

7.8%

5.5%

Selling, general and administrative

6.6%

6.1%

6.6%

6.7%

6.3%

7.0%

7.3%

6.0%

6.4%

6.5%

6.5%

Other Expenses (Income)

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Earnings Before Interest & Taxes (EBIT)

28.7%

30.5%

27.8%

26.8%

26.7%

24.6%

24.1%

29.8%

30.3%

29.8%

27.9%

Interest

-0.8%

-0.9%

-1.2%

-1.3%

-0.9%

-0.5%

-0.3%

-0.1%

0.03%

0.05%

-0.6%

Other non-operating expenses (income)

0.2%

0.4%

0.6%

0.1%

0.2%

-0.2%

0.0%

0.0%

0.1%

0.1%

0.1%

Earnings Before Tax

29.3%

31.0%

28.5%

28.0%

27.4%

25.3%

24.4%

29.9%

30.2%

29.7%

28.4%

Tax

7.6%

8.2%

7.3%

6.9%

5.0%

4.0%

3.5%

4.0%

4.9%

4.4%

5.6%

Net Earnings

21.6%

22.8%

21.2%

21.1%

22.4%

21.2%

20.9%

25.9%

25.3%

25.3%

22.8%

Apple Gross Margins by Segment

2017

2018

2019

2020

2021

2022

2023

Average

Product Revenue ($ bln)

199.3

227.1

213.9

220.8

297.4

316.2

298.1

Product COGS Estimate ($ bln)

119.3

139.7

134.7

142.3

183.3

192.5

180.6

Product Depreciation Estimate ($ bln)

8.8

9.3

10.3

8.9

9.2

8.9

9.0

Product Gross Margin

35.7%

34.4%

32.2%

31.5%

35.3%

36.3%

36.4%

34.5%

Product Revenue % of Total

86.9%

85.5%

82.2%

80.4%

81.3%

80.2%

77.8%

Services Revenue ($ bln)

30.0

38.5

46.3

53.8

68.4

78.1

85.2

Services COGS Estimate ($ bln)

12.2

13.5

14.6

16.1

18.6

19.9

22.0

Services Depreciation Estimate ($ bln)

1.3

1.6

2.2

2.2

2.1

2.2

2.6

Services Gross Margin

55.0%

60.8%

63.7%

66.0%

69.7%

71.7%

71.2%

65.4%

Services Revenue % of Total

13.1%

14.5%

17.8%

19.6%

18.7%

19.8%

22.2%

Total Revenue ($ bln)

229.2

265.6

260.2

274.5

365.8

394.3

383.3

Total COGS ($ bln)

130.9

152.9

149.2

158.5

201.7

212.4

202.6

Total D&A ($ bln)

10.2

10.9

12.5

11.1

11.3

11.1

11.5

Total Gross Margin

38.5%

38.3%

37.8%

38.2%

41.8%

43.3%

44.1%

40.3%

Margins

2018

2019

2020

2021

2022

2023

2024F

2025F

2026F

Product Segment

Revenue

227.1

213.9

220.8

297.4

316.2

298.1

319.1

338.3

356.9

Growth %

14.0%

-5.8%

3.2%

34.7%

6.3%

-5.7%

7.1%

6.0%

5.5%

Gross Profit

78.1

68.9

69.5

105.0

114.8

108.6

116.6

124.0

131.3

Gross Margin %

34.4%

32.2%

31.5%

35.3%

36.3%

36.4%

36.54%

36.66%

36.78%

COGS

149.0

145.0

151.2

192.4

201.4

189.5

202.98

216.37

230.06

iPhone Shipment (mln)

217.7

185.2

189.8

239.9

237.1

223.6

229.9

236.3

242.9

iPad Shipments (mln)

43.6

45.1

50.1

59.3

56.7

56.3

56.5

56.6

56.8

Mac Shipment (mln)

18.3

18.4

20.8

26.9

27.4

23.4

27.8

29.8

30.4

Wearables (mln)

61.7

96.6

166.9

145.9

149.5

139.8

154.7

170.8

188.3

Total shipments (mln)

341.3

345.2

427.6

472.0

470.7

443.1

468.8

493.6

518.4

Average cost per product

436.56

420.05

353.62

407.68

427.96

427.76

433.03

438.36

443.75

Growth %

3.8%

-3.8%

-15.8%

15.3%

5.0%

0.0%

1.23%

1.23%

1.23%

Services Segment

Revenue

38.5

46.3

53.8

68.4

78.1

85.2

95.6

107.1

119.9

Growth %

28.3%

20.4%

16.2%

27.2%

14.2%

9.0%

12.2%

12.0%

11.9%

Gross Profit

23.4

29.5

35.5

47.7

56.0

60.3

68.0

76.4

85.8

Gross Margin %

60.8%

63.7%

66.0%

69.7%

71.7%

70.8%

71.1%

71.3%

71.6%

COGS ($ mln)

15.1

16.8

18.3

20.7

22.1

24.9

27.6

30.7

34.1

Total installed base (bln)

1.4

1.5

1.7

1.8

2.0

2.2

2.4

2.7

2.9

Cost per installed base

0.011

0.011

0.011

0.012

0.011

0.011

0.011

0.012

0.012

Growth %

3.8%

4.0%

-1.1%

3.9%

-4.0%

2.4%

1.05%

1.05%

1.05%

Product COGS

149.0

145.0

151.2

192.4

201.4

189.5

203.0

216.4

230.1

Services COGS

15.1

16.8

18.3

20.7

22.1

24.9

27.6

30.7

34.1

COGS (Total)

164.1

161.8

169.5

213.2

223.5

214.4

230.6

247.0

264.1

Depreciation

10.9

12.5

11.1

11.3

11.1

11.5

11.8

11.8

11.8

COGS (Excluding D&A)

153.2

149.3

158.4

201.9

212.4

202.9

218.8

235.2

252.4

COGS % of revenue

57.7%

57.4%

57.7%

55.2%

53.9%

52.9%

52.8%

52.8%

52.9%

Our Previous Forecasts

2024F

2025F

2026F

Product Gross Margin

36.42%

36.54%

36.66%

Services Gross Margin

70.69%

73.57%

76.23%

Gross Margin

45.20%

47.07%

49.20%

EBIT Margin

31.91%

33.79%

35.92%

Net Margin

27.11%

28.69%

30.49%

Our New Forecasts

2024F

2025F

2026F

Product Gross Margin

36.54%

36.66%

36.78%

Services Gross Margin

71.10%

71.35%

71.57%

Company Gross Margin

44.39%

44.53%

44.60%

EBIT Margin

29.96%

29.60%

29.17%

Net Margin

25.53%

25.24%

24.87%

Apple Investing Cash Flow Analysis

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Average

Capex

9,571

11,247

12,734

12,451

13,313

10,495

7,309

11,085

10,708

10,959

Capex % of Revenue

5.2%

4.8%

5.9%

5.4%

5.0%

4.0%

2.7%

3.0%

2.7%

2.9%

4.2%

Capex % Fixed Assets

5.9%

5.6%

5.9%

5.0%

5.7%

6.0%

4.1%

5.1%

4.9%

5.2%

5%

Other Investing Cash Flow

13,008

45,027

33,243

33,995

-29,379

-56,391

-3,020

3,460

11,646

-14,664

Other Investing Cash Flow % of Revenue

7.1%

19.3%

15.4%

14.8%

-11.1%

-21.7%

-1.1%

0.9%

3.0%

-3.8%

2.3%

Free Cash Flow Margin (%) (Capex Only)

26.82%

29.22%

23.88%

21.59%

23.41%

22.22%

26.47%

25.37%

28.28%

26.02%

25.3%

Free Cash Flow Margin (%) (Total Investing Cash Flow)

19.70%

9.95%

8.46%

6.76%

34.48%

43.89%

27.57%

24.42%

25.33%

29.85%

23.0%

Apple Stock Repurchases

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Average

Apple Stock Repurchases ($ mln)

46,158

36,752

31,292

34,774

75,265

69,714

75,992

92,527

95,625

82,981

64,108

Apple Average Stock Price

20.48

27.10

24.10

35.34

45.06

50.42

93.40

139.03

153.53

170.66

75.91

Average Shares Outstanding (mln)

24,491

23,172

22,001

21,007

20,000

18,596

17,528

16,865

16,326

15,813

19,580

Average Market Cap ($ bln)

502

628

530

742

901

938

1,637

2,345

2,506

2,699

1,486

Stock Repurchase % of Market Cap

9.2%

5.9%

5.9%

4.7%

8.4%

7.4%

4.6%

3.9%

3.8%

3.1%

4.3%

DCF Upside

-0.33%

Stock Buyback Adjustment

4.3%

Total Upside

3.99%

Price Target

$200.20

Current Price

$192.53


Analyst’s Disclosure: I/we have a beneficial long position in the shares of AAPL either through stock ownership, options, or other derivatives. 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.

No information in this publication is intended as investment, tax, accounting, or legal advice, or as an offer/solicitation to sell or buy. Material provided in this publication is for educational purposes only, and was prepared from sources and data believed to be reliable, but we do not guarantee its accuracy or completeness.

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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