We Reiterate our $240 Fair Value Estimate on Apple

Shares of narrow-moat Apple AAPL are up over 70% since mid-March lows as we suspect the market is anticipating a 5G super-cycle for the firm’s upcoming iPhone and continued momentum in the services segment. Apart from the Worldwide Developers Conference held on June 22, at which Apple made several announcements related to its operating system updates and the decision to replace Intel chips with its own internally designed ones in future Mac PCs, we do not see a compelling justification to warrant the share price appreciation (beyond the broader market recovery in recent months). Rumors that Apple’s 5G iPhone may be delayed from a typical September launch have run rampant and the actual penetration of 5G devices during a global pandemic is at risk of falling short of expectations (200 million 5G units in 2020 per Qualcomm and mid-teens smartphone penetration per TSMC). Apple did not provide guidance for its June quarter at its last earnings call given the lack of visibility and we continue to believe there remains considerable risk to both the supply and demand prospects for Apple’s devices for the rest of 2020. The recent slew of store closings by Apple in the U.S. also does not provide comfort (though we concede customers can still buy new products online). From a valuation perspective, the stock is trading north of 30 times our 2020 EPS estimate, which does not seem justified for a firm that we see growing at a 5% top-line CAGR on the whole over the next five years.

Our fair value estimate of $240 per share does imply high-teens growth for Apple’s services segment in fiscal 2020. For the near-term services outlook, strength in App store, video, music, and cloud services due to increased customer engagement with Apple’s ecosystem and digital services is expected to be offset by weaker Apple care and advertising sales, per management during Apple’s last earnings call.

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