Has Wall Street has totally underestimated the value of Apple (NASDAQ: AAPL) stock?
We think so.
Apple stock sold off the day after the recent product announcement of new iPhone 11 series, a new, lower cost iPad, more functionality on the iPhone camera and a new Apple Watch.
Wall Street wasn’t impressed.
Hotshot financial analysts were asking is there anything beyond the iPhone sales and an aggressive stock “buy-back” program?
Yes … there was.
Announcement Plus …
The announcement also included two new services – Apple Arcade, a gaming service, and Apple TV, a video streaming service.
And the new streaming service will begin with only nine original programs.
Investors liked what they saw and the stock traded up after news that streaming service will be free for anyone buying an Apple device. That could translate into 70-80 million users in one year. Or more.
Apple is taking the long view.
And you should too.
Independent of these new services, Apple’s existing services business is large enough to qualify as a Fortune 100 company.
Services revenue in the second calendar year quarter ending June 30 was $10.46 billion dollars, more than 20% of revenue.
This translates into annual services revenue north of $45 billion dollars. Without the new Apple Arcade and Apple TV services.
Online Streaming Services
Enter Apple’s new streaming services.
But wait. The competition is fierce in the streaming marketplace … Netflix … Roku … Disney … Google … Comcast … and many more.
Let’s hypothesize for a moment and Apple adds not 80 but only 40 million Apple TV subscribers in that first year who renew at $6 a month. That is $240 million a month. Or $3 billion a year. Most of it pure margin.
At 80 million subscribers, that is $6 billion a year.
And let’s say three to five years from now they have 100 million subscribers at $7 a month (inflation) that is $8.4 billion a year in revenue on top of the 20% annual growth other services contribute.
In three to five years the services business could be a $85-$100 billion dollar business. Facebook’s (NASDAQ: FB) total revenue in 2018 was $46.5 billion, could come in this year around $62-$65 billion.
Netflix (NASDAQ: NFLX) may hit $20 billion in revenue in 2021.
This is what has investors excited. Are you?
Double Digit Growth
Consider this: All the double-digit growth areas for the company are in services.
The company is no longer breaking out iPhone sales numbers, another indication Apple is going to pound the market with high margin programs such as Apple Arcade and Apple TV.
Of course, the core business is in terrific shape.
In calendar Q2 the company beat analyst estimates with $54 billion in revenue, in a quarter that is not the company’s strongest. The company is sitting on $211 billion in cash – more cash than the GDP of all but the 50 largest economies in the world.
And Apple takes care of its shareholders – they spent $21 billion in stock buybacks and dividends in the latest quarter.
Throw in the new service businesses and that valuation looks downright foolish. The stock sells for 17 times forward earnings. That’s almost exactly the same as estimates for the S&P 500 despite faster growth, more stock buybacks and all that cash.
The best days of Apple stock are ahead.
The bottom line – the existing Apple businesses are undervalued by Wall Street.
And that means the stock is on sale.
Buy Apple stock now.
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About The Author
Michael Shulman is a 30 Year Veteran of the financial markets – as a trader, a financial analyst, a financial writer and most recently as an educator.
Michael has published two books – Sell Short and Made in America – both of which can be found on Amazon.com, and he is a frequent contributor to reputable financial sites like Seeking Alpha, MSN, MainStreetInvestor, and Traders Reserve.
Most importantly, since 2010, he has dedicated himself to teaching income investors how to get more income from their portfolios using simple yet safe options selling strategies which produce income every week. This approach was developed from the ground up in Mr. Shulman’s own accounts, his goal to develop a strategy that cannot be replicated by institutional investors of any size and therefore independent of fads and trends that change too often to provide a consistent approach for individual traders.
His trade recommendations in his Options Income Blueprint, Perpetual Income Portfolio Club and Income Masters services maintain a 98% success ratio, meaning his trades produce the expected income 98% of the time. No one’s perfect.