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Here's What Will Determine Apple's 5G Success

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Apple’s  (AAPL) - Get Apple Inc. Report new iPhone 12, unveiled Tuesday, is 5G-enabled and ready to sell. But several factors need to fall in the giant’s favor in order for it to be a hit that can aggressively drive the stock.

The stock is up a little more than 3% to $120 a share and investors got what they were looking for out of the new iPhone 12, which management says will have faster download and internet speeds as a result of 5G. Some analysts have moved their near-term earnings estimates up slightly and investors seem comfortable paying a roughly 30 times multiple on next year’s earnings per share. With EPS expected to compound at roughly 8% a year for the next several years -- and mixing in some multiple compression if one is to be conservative -- the stock could perform decently compared to expectations for global equities. Many also believe there is upside to the vast services business Apple is entrenched in.

For the near-term, it is yet to be seen whether the 5G capability will be enough of a value-add for iPhone users to replace existing iPhones. "We continue to see 5G as more a brand than a

feature with advantages for carriers but not much value for iPhone owners,” wrote Goldman Sachs analyst Rod Hall in a note.

But Morgan Stanley analyst Katy Huberty sees Apple selling 220 million iPhone units in 2021, above the average analyst on The Street and representing growth in the mid-single digits in percentage terms. She raised her price target to $136 a share, but says her bull case of $171 a share, reflecting 9% unit volume growth, is coming closer to reality.

Part of her raised revenue forecast was also a $3 lift to average selling price to $775. Apple dropped the price of its $1,000-plus premium phone, the iPhone 12 Pro Max, by $50 over last year’s new iPhone 11 Pro Max. Cheaper phones are more expensive year-over-year, but one differentiating factor between those bullish and those bearish on the upgrade cycle is that the bulls on Wall Street expect a heavy sales mix tilted towards the most expensive iPhones.

Others on Wall Street are bullish. "We maintain our Outperform rating on AAPL as we believe the arrival of 5G wireless and a range of screen form factors could be a catalyst for consumers to replace older devices,” wrote Cowen analyst Krish Sankar in a note.

It’s also possible that Apple could take market share in smartphones at large, especially as China’s Huawei cannot produce as many units as it had initially planned because the U.S. has placed restrictions on U.S. semiconductor sales to Huawei.

The major difference between the bulls and bears on Apple is that the optimists are willing to price Apple at a multiple that likely reflects considerable upside to current services estimates, which call for revenue growth in the mid-teens in percentage terms for the next several years. Pessimists wonder if Apple’s ability to compete in services like payments, entertainment streaming and gaming will be limited enough to keep estimates at bay.

That’s a lot to unpack.

For investors with a shorter time horizon, the upgrade cycle will be key. Apple may take market share from Huawei -- sure -- but it also wants to keep its hardware innovation curve strong enough to get consumers to upgrade and it wants to keep them buying the higher priced phones. None of that is new to market participants and observers, but the 5G upgrade cycle could keep growth stable or it can add a short-term pop in earnings that can drive the stock in the near-term and potentially keep consumers highly engaged in new services, supporting the long-term story. 

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