Apple (NASDAQ:AAPL) : Still A Buy Rating 🚀

$Apple(AAPL)$

Summary

Bloomberg reported that Apple is considering a hardware subscription strategy for its devices.

We discuss why it could help Apple penetrate more effectively into Android's traditional strongholds and take share.

We also discuss why AAPL stock is a Buy.

Investment Thesis

Apple Inc. (NASDAQ:AAPL) was reported to be considering a hardware subscription service for its suite of products. So naturally, the attention is on its flagship iPhone segment. Nevertheless, nothing has been confirmed, and plans could continue to be developed or even stalled.

However, we believe it could mark a significant pivot in Apple's strategy to reach further into Android's (GOOGL) (GOOG) installed base. Apple's 5G launches starting with iPhone 12, have seen tremendous success in the US and China. Furthermore, iPhone 13 has continued its massive momentum. Recent supply chain checks also revealed that it's trending ahead of estimates, despite the transitory shutdown by its key contract manufacturer Foxconn (OTCPK:HNHAF).

We discuss why hardware/iPhone subscriptions could be a massive game-changer. We also maintain our Buy rating on AAPL stock. But, we noted a robust recovery from its March bottom, and its price action doesn't seem ideal to add exposure.

Apple's Key Stock Metrics

AAPL stock's NTM EBIT multiple of 22.9x is trading ahead of its 3Y NTM EBIT mean of 20.2x. So, AAPL stock has moved away from the 20x multiple that has supported its stock over the past year.

Furthermore, the stock has also progressed well ahead of its most conservative price targets ((PTs)) as seen above. Its most conservative PTs have been robust support levels for AAPL stock over time. Therefore, we think the current buy zone is not ideal if you are looking to add exposure. But, if you are not concerned with near-term volatility, its stock is still not significantly overvalued.

Why Apple's iPhone Subscriptions Could Be A Game-Changer

Bloomberg reported that Apple is mulling a subscription service for its hardware, including its iconic iPhone. Therefore, subscribers would only need to pay a monthly fee. Apple would manage the program through a subscriber's Apple account, similar to how they have subscribed to other Apple services.

Notably, it's different from its current installment programs. Bloomberg noted (edited): "The monthly charge wouldn't be the price of the device split across 12 or 24 months. Rather, it would be a yet-to-be-determined monthly fee that depends on which device the user chooses."

We believe that this could be a noteworthy development in Apple's services strategy. Apple has been moving ahead with monetizing its massive hardware active installed base that has exceeded 1.65B. Of these, it reported that 785M have signed up as subscribers for its suite of services in FQ1'22 (CQ4'21).

Apple's premium smartphone leadership has undoubtedly helped it extend its lead in its segment. For example, Counterpoint Research pointed out that Apple has continued to expand its premium segment market share in China. It accentuated that Apple captured 63.5% in the premium segment share in 2021, compared to 55.4% in 2020. Therefore, Apple has capitalized on Huawei's demise with incredible "ruthlessness," despite the best efforts from its Chinese smartphone rivals.

However, according to StatCounter, Android remains the most important mobile OS globally, with a device share of 71%. Therefore, it's clear that most users are still equipped with much cheaper Android phones, and Apple has yet to penetrate this segment.

While the $429 iPhone SE 5G holds promise, the Street has projected just about 30M units this year. Furthermore, DIGITIMES also reported that Apple shipped about 25M to 30M units of its previous iPhone SE in 2020 in its first year of release. Moreover, Counterpoint Research also highlighted that it accounted for about "12% of Apple's total iPhone unit sales from its launch in Q2 2020 to Q4 2021 - with Japan and US the biggest markets for the device globally."

Is AAPL Stock A Buy, Sell, Or Hold?

AAPL stock is slightly overvalued, but not by much. Therefore, if you need a higher margin of safety, you can consider taking a 10-15% haircut.

Otherwise, if you have a firm conviction of Apple's execution ability, the current price could offer a suitable opportunity to increase exposure.

Furthermore, we think Apple has several optionalities that have not been factored into its stock price. And the potential hardware subscription strategy adds to its growing list of monetization potential.

As such, we reiterate our Buy rating on AAPL stock.