Stocks
Apple’s Subscription Plan Could Boost the Stock But Leave iPhone Buyers Hurting
Apple wants to allow you to rent an iPhone, just like in the old Bell Telephone days
Back in the 60s, 70s, and even the 80s you had to rent your handset phone device from AT&T or one of the Bell telephone companies. I remember in college and graduate school every time I went back to school I had to stand in line at the outlet store and pick up the handset and pay $10 a month just to rent it. Now Apple wants to do something similar.
According to Bloomberg magazine, they are considering instituting a “subscription” plan for their iPhones. Their phones are so expensive now that people are no longer upgrading every 2 years. They are waiting longer and Apple needs this to stop.
The way around it is to essentially lease a phone that allows you to upgrade every 2 years. You never own the phone. You just upgrade and keep paying a $60 or $80 charge. This is on top of the monthly service you have to pay to the carrier.
This will be great for Apple and for their massive free cash flow. But it might not be all that great for consumers.
Apple’s New Subscription Plan Could Boost FCF
News emerged this week from several sources that Apple wants to start an iPhone upgrade subscription service instead of regular purchases. But users will still have to pay for the telecom carrier phone service as well.
As Bloomberg points out, this is nothing more than leasing regular iPhone upgrades rather than buying them. It really services Apple quite well, since most people wait three years to upgrade their phones when they normally pay them off in two years. That has left a one-year gap with no revenue for Apple. It also benefits iPhone users since they can upgrade their phones after two years.
Bloomberg shows how Apple comes out ahead in this scenario. It gets the benefit of amortizing the purchase of three phones over six years instead of just two phones.
This will significantly improve Apple’s already ample free cash flow margins. Apple enjoys a 35.6% FCF margin as of Q4. This is extremely high. It made $44.16 billion in FCF from revenue of $123.9 billion in quarterly revenue.
If these subscription plans go through, Apple could gain another year’s worth of margins over a six-year cycle or another 16.7%. So theoretically, that raises its margins by 16.7% to 41.5%. Here is how that would increase Apple’s value.
What AAPL Stock Could Be Worth
Let’s assume Apple can raise its ongoing FCF margins to 40%. We can apply this to forecasts of Apple’s revenue.
For example, 40 analysts surveyed by Refinitiv have an average revenue forecast for 2022 of $395.96 billion. And for 2023, their estimate is $418.34 billion.
Therefore, assuming 40% of revenue in 2023 will turn into free cash flow, Apple will generate $167.3 billion in FCF that year. That helps us estimate a target price for AAPL stock.
For example, we can assume the market will value Apple with a 5% FCF yield. This is the same thing as using a multiple of 20 times. So, if we multiply $167.3 billion by 20, we get a target market capitalization of $3.347 trillion.
That represents a 15.0% upside for AAPL stock from its present market cap of $2.91 trillion. This means that over the next year, AAPL stock could rise at least 15.0% to $205.21 per share.
Where This Leaves Investors and Consumers
Whereas Apple may make more money and the stock could rise with a subscription plan, it might not be the best thing for consumers.
On the positive side, they would get free upgrades as long as they kept renewing their subscription plans. But this will only feed the beast. Apple will get to continue racking up higher and higher prices for their phones, making them even more profitable.
The downside is that just like in the 60s through the 80s, you will be stuck renting a device, never owning it. I paid for my present phone over three years ago with a lump sum payment. I haven’t had a very high ongoing price for these past three years paying down the cost.
Will consumers go for this? Maybe, except until a price war hits in the telecom market, just like it did in the late 80s, forcing the market to get competitive. That is bound to occur at some point with smartphones. Apple could be in real trouble then.
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Mark Hake writes articles on InvestorPlace.com, Barchart.com, Medium.com, and Newsbreak.com on stocks and cryptos.
