Here’s how: Apple added about $31 billion in total revenue between FY’17 and FY’19 (fiscal year ends in September), marking an increase of 13.5% over two years. Margins remained almost flat at 21% – producing about $7 billion in incremental profits for investors. Investors, however, have valued these profits more richly, at a multiple of about 115x, and this translated into $800 billion in additional value between 2017 and now. In other words, this has meant that Apple’s overall trailing P/E multiple expanded from about 18x at the end of 2017 to about 32x presently. So why exactly are investors assigning a higher multiple to Apple’s earnings? Is the 115x multiple on the $7 billion incremental profits from the last few years, really crazy? Sure, lower interest rates and the flight to quality stocks in the times of uncertainty are a factor, but let’s look at Apple’s sales mix a little more closely for more answers.
Our dashboard What Factors Drove 135% Change In Apple Stock Between 2017 And Now? breaks this down for you.
Apple’s Services business has accounted for over half the $31 billion revenue growth over the last 2 years, with Services Revenue rising by $16 billion to $46 billion as of FY’19. Services have thicker gross margins (64%, vs. about 32% for hardware) and they help keep customers locked-in to Apple’s ecosystem. Apple’s Other Product sales have also soared, rising by almost $12 billion to $24.5 billion, driven by the uptake of products such as the AirPods wireless earphones and the Apple Watch. While these products have lower margins than services, they also help to defend Apple’s profit machine by increasing switching costs for Apple products. The growth in these two segments has meant that investors have largely discounted the middling performance of Apple’s flagship product – the iPhone ($1 billion in sales growth between FY’17 and FY’19) and the iPad and Mac ($2 billion growth).
Could This Happen Again In The Next Few Years?
If Apple’s Revenues grow by about 30% between FY’19 and FY’22 (average growth of 9% per year, ahead of the 6.5% average annual growth rate seen over the last 2 years), driven by the launch of 5G iPhones and growth of services such as Apple TV+ streaming, with Net Margins rising by about 100 bps to around 22%, driven by higher prices on devices and a higher mix of services margins, Apple’s Net Income would grow by roughly 35%.
Now if earnings grow 35%, the P/E multiple would shrink by a similar amount (about -35%), assuming the stock price stays the same, correct? But that’s exactly what Apple’s investors are betting will not happen! If earnings expand 35% through FY’22, instead of the trailing P/E shrinking from around 32x presently to about 21x, a scenario where the P/E declines more modestly to about 28x looks more likely.
For perspective, the current P/E multiples for the key markets Apple plays in are as follows – Telecom and Wireless equipment (27x), Internet Software (about 90x), and it is probably reasonable to assume that Apple, despite its size, could justify a multiple of about 28x.  This would make a roughly 20% growth in Apple’s valuation (about $300 billion in incremental value) to close to $2 trillion a possibility in the next two years or so.
Of course, Apple’s Services business is a big driver of its value, but which specific services are really driving growth? Our dashboard Breaking Down Apple’s Services Revenue estimates the numbers for AppStore, Apple Music, Apple TV+, iCloud, Third-party Subscriptions, Licensing, Apple Care, and Apple Pay.
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