Shares of Apple (AAPL) are up $3.71, or 2.6%, at $145.98 after Maxim Group’s Nehal Chokshi this morning reiterated a Buy on the shares, and raised his price target to $180 from $171, after concluding the company’s “steady state” for iPhone sales, and so the stock should be valued based on 2019’s estimate.
As Chokshi explains, after taking a survey of consumers, he concludes one can assume Apple’s steady-state sales are likely to be 250 million iPhones per year, and so one can arrive at a 2019 estimate of $11.17 per share in net income, just slightly above consensus:
We estimate that AAPL’s iPhone user base is around 650M (assuming an average three-year refresh cycle) currently and per Figure 1, our survey data indicates overall user growth will be 8% per year. On a regional basis, as summarized in Figure 11 below, China will generate an ~18% per year user base growth while non-China (which we use a combination of U.S. as a proxy for mature markets + India) will be ~5% per year. Thus, using a 3.25 year refresh cycle (consistent with our most recent survey data, see Figure 3) and a blended 8 % per year user base growth rate, we estimate the steady state annual iPhone unit purchases is around 250M devices per year that will grow about 8% per year (see Figure 12 for unit and EPS sensitivity to these key normalized assumptions). We have synched our FY19 iPhone unit estimate to this 250M per year level (down 14% y/y from FY18 levels), which yields $266B in revenue and $11.17 in EPS (vs. consensus of $256.7B and $11.15).
As Chokshi describes it, his firm conducted a survey of 362 United States participants, 192 India participants, and 197 China participants, with the help of an outside survey firm called Survata. The upshot is consistent growth of the iPhone user base, he writes: “Over three surveys conducted over a 2.5-year period, iPhone user base has been and continues to be projected to increase at an 8% CAGR, a key tenet to remaining Buy rated on a normalized earnings power basis.”
Chokshi describes the survey results since his started coverage of Apple in 2015:
We initiated coverage on AAPL on April 15, 2015 with a Hold rating as our survey data led us to conclude iPhone 6S cycle (FY16) units would be down 14% y/y (ended up being down ~8% y/y), well below what we had triangulated was a consensus estimate of up ~10% y/y (and corresponded to 900bp of underperformance to point of upgrade). On October 23, 2015, we upgraded AAPL to a Buy, believing the iPhone 6S down cycle had been priced in and that our prior survey data indicated iPhone 7 (FY17) cycle units would be an up year. We conducted a new survey in May 2016 (data distributed over note I & II) that validated our upgrade thesis, which has largely transpired and corresponded nicely with ~2200bp of AAPL share outperformance. While we note that conducting online survey work is no longer unique, we believe the questions we ask and the deep cross sectional analysis we conduct provide an ability to extract a greater level of precision and understanding on the underlying trends (see page 12 for a greater discussion around survey methodology, questions and analysis process), that ultimately lead to our data driven process providing sound investing advice with respect to AAPL. Over the three surveys we have conducted at Maxim, Figure 1 shows a striking trend that the % of survey participants that are iPhone users has increased in each survey as well as the % of participants that intend to become an iPhone user has increased as well (See Figure 1 above). This key data point underpins our long-term positive view on AAPL, in that AAPL’s brand remains strong and continues to attract net new users into the iPhone user base, much the same way the Mac’s user base has been increasing over the past 14 years that had led to consistent PC market outperformance and premium pricing power that leads to very attractive ROICs (even more so when adjusting for excess cash AAPL holds).