Moscow, 30 July — “Conduct. The economy” following the close of trading on Friday, stock index the Nasdaq Composite fell 2.5 percent from a historic high achieved at auction July 25. Pressure on the quotes of the Nasdaq Composite had a decrease in Facebook shares at a record 20% after receiving management of the negative Outlook for revenue growth and operating margin. On this negative background are not left behind and Apple shares, which fell 2.3%. Tomorrow Apple will release financial statements at the end of Q3, we expect strong operating results, however, given the value of the market multiples of the company, as well as the negative external background, we recommend investors to consider buying shares after a technical correction from the current prices. While our target price at year end is $ 220., that implies upside of 15%, says Ainur Duysembaev, analyst IK “Veles the Capital”.
Overview of Apple with revenues of $ 228,5 billion. USA (up to 2017) is one of the largest companies in the world. Over the past decade the company’s strategy was the formation of a diversified approach to users through the integration of software, hardware, and personalized services.
The company’s revenue is generated in the 5 major operating segments: iPhone, Macintosh, iPad, service and other products. The largest segment remains the iPhone, sales of which form 62% of the total revenue of the company. However, the last three years a rise in the share of the service segment (the segment includes iTunes, App Store, Apple Music, Apple Care, iCloud), which accounts for 13%. Current trends in the structure of revenues, in our view, are positive, given the high saturation of the global smartphone market.
By the end of 2017 the number of shipped smartphones in the world decreased (by 0.3%), the main slowdown has had on developed markets. According to IDC, this year we will also see negative growth, but positive trends are observed in the segment of premium smartphones (an increase of 0.2%). In the 1st quarter, the share of sales of the iPhone in worldwide sales was 11.2%, while (compared to the same period last year), the number of iPhone sold increased by 2.9%. Despite some scepticism about iPhone X on the last conference call, CEO Tim cook noted that iPhone X is the best-selling model in all regions since its launch in November 2017, and the level of satisfaction of users of the company amounted to 95%.
Let us consider the dynamics of the sales of other products of the company. The number of sold iPad have declined for the past 13 quarters and only in the third quarter of 2017, the increase was 14% on the back of growth in demand for iPad Pro. In our opinion, in 2018, the growth in iPad sales will be about 1-2%, with the overall industry trends. It should be noted that Apple still holds the leading market share (24%) in this segment.
Mac sales in the first two quarters show negative growth, after rising slightly in 2017, In our view, structural changes in the industry will continue to put pressure on the growth of Mac sales (cannibalization of the sales PCs from smartphones and tablets, as well as the lengthening of the period of use of the PC). This year, we expect Mac sales to remain at last year’s level.
In our opinion, in the medium term one of the major segments revenue growth of the company will be the service segment. At the moment it is about 13% of the total revenue of the company, when considered individually, the revenue the segment would have entered the list of Fortune 500 companies. Over the past two years services segment was the fastest growing exceeding the growth of total revenue 2.5 times. By results of 2 quarter segment revenue totaled $ 9 billion., higher 29% same period last year. The main contribution to the growth of the segment has made a sale in the App Store, Apple Music, iCloud and Apple Pay. The number of paid subscriptions for the quarter exceeded 270 million, 100 million more than the same period last year. Apple Pay continues to show strong results: the number of active users during the period has doubled, the number of transactions increased 3 times.
At the moment Apple Pay is available in 21 countries and Apple plans to expand market presence: this year, services will be available in Norway, Poland and Ukraine. In 2017, the management has declared its determination to double the revenues of the services segment in the next four years, which implies a 19% CAGR. It should be noted that the operating margin of the segment is 50-55% with average margins of 35-40%, respectively, growth of this sector will not only increase the company’s revenue, but will lead to higher margins overall. Despite the high competition in the services segment, in our view, Apple has a strong ecosystem has the ability to take a leading position in the development of new directions: artificial intelligence and augmented reality.
Expectations on the financial statements for the 3rd quarter In the 3rd quarter it is expected that revenue will increase 15.2% due to growth in iPhone sales and revenues of the services segment. IPhone sales since the beginning of the year shows stable growth, last quarter revenue growth was 14.4% after the launch of the iPhone X, 8 and 8 Plus. The expansion of the promotes sales growth, and for the quarter the increase in revenue from sales of iPhone, according to the consensus forecast, will be 15%. Management efforts for the growth of revenue by segment services and other products bring real results, at the end of the 2nd quarter the share of these segments in the consolidated revenues increased to 21.5%. In our view, these segments will show growth in the 3rd quarter in particular, given the sales in the App Store, iCloud, the Apple Watch and the Air Pods.
The current valuation of the stock Market multipliers Apple at the moment are above srednestatichesky values. However, in our opinion, these estimates justified the current operating results of the company, as well as favorable macroeconomic factors (low interest rates, robust economic activity).
Thus, if we consider the valuation of the company relative to the market as a whole, currently the company’s shares are traded at the lowest level of discount on market multipliers P/E relative to S&P500 that characterizes a certain revaluation of stock at the moment. Therefore, despite our positive expectations on the financial statements for the 3rd quarter, we recommend investors to consider buying stocks after a technical correction from the current prices. While our target price at year end is $ 220., that implies upside of 15%.
The main risks Short-term risks include potential operational risks and reduced margins on the background of changes in product mix.
In our view, the introduction of import duties from the US for imported equipment from China, particularly Apple products, are unlikely. However, in the case of the introduction of trade duties, import prices will increase, which will reduce the company’s revenue.
The possibility of revaluation of the market multiples of the company against the background of correction in the technology sector because of the current inflated estimates.
Long-term risks include reduced demand for products in developed countries coupled with a high level of market saturation. Competition in emerging markets is complicated by the pricing policy of the company.
The level of competition in the industry remains quite intense, it requires faster technological change in the company’s products.
The strengthening of the U.S. dollar against a basket of currencies may put pressure on the company’s revenues.