A few days ago, I spoke with Wedbush’s Dan Ives about all things Apple stock (AAPL) – Get Report. Among several interesting topics of conversation, we chatted about valuations. Apple share price has been on a tear in the past couple of years, and a trailing P/E of 33 times causes discomfort in some investors.
But Dan had a different take on valuation. The Apple Maven discusses below how the analyst arrives at his market cap target of $3 trillion-plus by next year.
It’s not about P/E
When I brought up the topic of valuation and mentioned price-to-earnings ratio, Dan Ives was quick to present a different view on the subject. Here is his quote:
“I believe you have to view it as sum of the parts. A straight P/E does not capture the value of Apple. Is it a hardware company, or is it a software and services company? More and more, it gets valued with the likes of Facebook and Google, in terms of the internet multiple.”
This is an excellent point. Not long ago, call it five to ten years, Apple was primarily the iPhone and iPad maker. Since around 2016, the Cupertino company began a push to monetize its installed user base (of over 1.5 billion devices today), committing to doubling the services segment within five years.
Apple has achieved its goal, and it seems to be on track to doubling services once again in another few years. Dan Ives believes that this consistent growth, high margin segment accounts for at least half of Apple stock’s current value of $2.4 trillion today:
“Let’s just do sum of the parts: services business, let’s call it $70 or $75 billion [next year]. What’s the multiple on revenues, is it 10 times, 15 times? That services business is worth anywhere from $1.3 to $1.5 trillion.”
Dan’s analysis is remarkably close to my own, from early 2020. Back then, I estimated that services “may very well account for most of Apple‘s market value”. I assigned an EV/EBITDA multiple of 50 times to the segment, which is consistent with EV/sales of 15 times – services carried 66% reported gross margin in 2020, maybe 30% to 35% estimated EBITDA margin.
What about hardware?
“Then you look at everything else: hardware, ecosystem. I believe that is worth $1.5 to $2 trillion. That’s the best way to value Apple.”
Of course, the analyst summarized his valuation calculation by lumping all hardware together. But under the hood, he would probably agree that certain segments deserve to be valued more richly than others. In my view, wearables could be one of those, given the high post-pandemic growth profile.
Today, the iPhone itself probably deserves a better valuation multiple too. While smartphone sales across the industry may have seen peak growth a few years back, I think that Apple’s device is more likely to benefit from (1) the early innings of the 5G upgrade cycle and (2) the brand-name recognition.
Recently, I asked Twitter if my thesis on Apple stock – that it has moved towards undervalued territory once again, after fiscal Q3 earnings – made sense. Here are the answers.
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