PhillipCapital has initiated “buy” on Apple Inc. on Aug 20 with a target price of US$187 ($255.05), representing a 28.1% upside to its last-closed price of US$146.70.
The target price is based on a discounted cash-flow (DCF) valuation with a weighted average cost of capital (WACC) of 5.8% and terminal growth of 3.0%, writes research analyst Timothy Ang.
In his report, Ang highlighted three merits to investing in Apple, including the anticipation of record iPhone sales to be seen in the FY2021 and FY2022, thanks to 5G.
The tech giant, which launched its flagship 5G iPhone 12 line-up in 2020, sold 100 million units two months earlier than that of its iPhone 11.
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Ang also notes that sales volumes were close to that of its iPhone 6 super-cycle during the transition to 4G in 2015.
“Customers see 5G as a key reason for upgrading their iPhones after years of holding back replacements. Apple’s new iPhone 13 line-up is expected to be launched in September 2021, featuring up to 20% more efficiency and larger batteries to complement the power-hungry 5G phone,” he writes.
Apple itself has ordered over 100 million A15 chips from Taiwan Semiconductor Manufacturing Company (TSMC) for the launch, which is 25% more than the 75 million chips for its iPhones in 2020, he notes.
“We expect the iPhone super-cycle to continue, with FY2021 and FY2022 sales potentially topping 2015’s record of 231 million units sold. This would be powered by upgrades from an estimated 48% of the iPhone users still using iPhone X and older. iPhone sales are Apple’s main cash cow, at 50% of sales in FY2020,” says Ang.
Apple’s margins are also likely to remain elevated on the back of strong growth in its services, coupled with higher average selling prices (ASPs) of 5G devices in the product segment.
“Service margins of 66% are more than double product margins. Service revenue has also been expanding at a faster compound annual growth rate (CAGR) of 17% vs flat growth for iPhone. Growth is spearheaded by Apple’s ever-growing installed base, which topped 1.65 billion in January 2021,” he observes.
While Apple’s service growth is expected to moderate after its bumper results in 3QFY2021, its 5G products will allow it to raise weighted ASPs by over 20% from a year ago.
To this end, Ang expects Apple’s growth margins to hit above 40% in FY2021 and FY2022, higher than its five-year historical average of 38%
Finally, Apple’s share of global smartphone sales breached a five-year high, hitting 21% in 4QFY2021, compared to the chip shortages faced by its competitors.
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For instance, Samsung was hit by shutdowns in Texas and factory suspensions in Vietnam, which may delay the launch of its new Galaxy Note in 2HFY2021.
“Apple holds buying power over suppliers through scale purchases and upfront cash payments, leaving competitors handling price shocks and shortages created by Apple deals,” says Ang.
Shares in Apple closed 34 US cents higher or 0.23% up at US146.70 on Aug 19.