Apple Inc. (AAPL) is up 40% so far in 2017 and more than 60% from its mid-2016 lows, after having just made new highs. Though the Nasdaq's gains and iPhone 8 enthusiasm are clearly factors, I think another one is also at work: Markets are revaluing Apple, which previously traded at very cheap multiples, to account for the stability and pricing power its core iPhone franchise is showing, as well as its potential to deliver moderate long-term earnings growth with the help of both the iPhone and complementary businesses.
This revaluing process might not be over, even if a large chunk of it probably is. And together with a solid iPhone 8 debut, it could let Apple continue its run-up in the coming months.
Apple still only trades for 15 times a fiscal 2018 (ends in September 2018) GAAP EPS consensus of $10.74. And that multiple doesn't account for $153 billion in net cash ($261.5 billion in cash minus $108.4 billion in debt). Even if one applied a 20% discount to the $246 billion in cash kept overseas -- for now, a 10% offshore cash tax holiday isn't a given -- Apple trades at just 13 times expected fiscal 2018 EPS after backing out net cash.
That's a much lower multiple than not only what tech firms such as Microsoft Corp. (MSFT) and Alphabet Inc./Google (GOOGL) trade for, but also what companies such as Starbucks Corp. (SBUX) , Nike Inc. (NKE) , Coca-Cola Co. (KO) and Procter & Gamble Co. (PG) are valued at. These latter companies -- owners of major consumer brands commanding strong loyalty and pricing power, and seeing moderate sales and earnings growth -- arguably represent Apple's peer group more than Microsoft, Google or IBM (IBM) . And Apple continues trading at a discount to that group, albeit less of one than before.
The fact that iPhone pricing has held up so well in recent years, even as carriers in the U.S. and elsewhere have ditched traditional phone subsidies in favor of installment and early-upgrade plans, shows that Apple has a thing or two in common with Nike or Starbucks. On average, analysts expect Apple to see a $653 iPhone average selling price (ASP) in fiscal 2017, up $8 from a year earlier. For fiscal 2018, ASP is forecast to rise to $687 with the help of the iPhone 8, which is expected to carry a higher starting price than the iPhone 7-Plus' $769.
Jim Cramer and the AAP team hold positions in Apple, Alphabet and Starbucks for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL or GOOGL or SBUX? Learn more now.
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Though the end of traditional subsidies has extended smartphone upgrade cycles a bit, fears that it would seriously hurt the iPhone's market share and ASP -- fears that likely weighed on Apple's multiples before -- have been unfounded. Indeed, as smartphones have become the primary computing device for hundreds of millions of consumers, both Apple and Android rivals have remained comfortable charging well over $600 for their best phones.
Meanwhile, in terms of market share, the iPhone has been more than holding its own outside of China. While both the iPhone and Android claim strong customer loyalty on the high-end, only Android competes on the low-end. Thus Apple has a chance to snag some of the business of low-end Android users looking to move upmarket as smartphones become more and more important to their daily lives, but doesn't have to worry about a similar phenomenon in the other direction.
The iPhone 8, expected to feature a curved OLED display, wireless charging support and cameras with 3D depth-sensing abilities that enable augmented reality applications, should help Apple win more Android converts and stabilize its Chinese position. And though it won't have a big impact in the near-term, the company's new ARKit platform could turn into a valuable selling point by enabling powerful iOS augmented reality apps. Only a few low-volume Android phones support Google's rival Tango platform, which requires specialized components, giving ARKit a major edge for now in developer support.
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And though their performance often fluctuates significantly from quarter to quarter, there are reasons to think Apple's non-iPhone businesses can collectively deliver moderate sales growth over the long run. Mac sales, aided by a well-received MacBook Pro refresh, are expected on average to grow 9% this year to $24.8 billion. iPad sales, under pressure for years due to cannibalization from phablets and slow upgrade rates, managed to grow 2% last quarter thanks to the launch of a $329 iPad. Sales of iPad Pro models could get a lift this fall from the launch of iOS 11, which adds a number of iPad-focused multitasking features.
Apple's "Other Product" revenue is expected to grow 10% this year to $12.4 billion due to strong demand for the Apple Watch and AirPods -- two products that are in effect iPhone accessories, and whose success says a lot about the iPhone's ability to drive sales of other Apple hardware. And the company's Services revenue, lifted by continued double-digit growth in the iPhone installed base and Apple's improving ability to monetize this base via App Store transactions, Apple Music/iCloud subscriptions and Google search ad revenue-sharing payments, is expected to grow 19% to $29 billion.
These trends don't mean that Apple will be posting sales growth rates similar to, say, Facebook or Amazon anytime soon. But they could position the company to deliver the kind of growth that the likes of Starbucks and Nike are expected to. And if Apple gives investors reasons to think it will pull this off while also convincing them that it's similar to high-profile consumer brands in other ways, its rally could be far from over.
Apple shares closed trading down 0.4% to $160.95 Wednesday.