Needham analyst Laura Martin reiterated a buy rating on Apple Inc (NASDAQ: AAPL) and a $260 price target.
The price target is based on a Discounted Cash Flow (DCF) where Martin used a cash tax rate of 15%, a weighted average cost of capital (WACC) of 8.8%, and a long-term nominal GDP growth rate of 2%.
Martin projects that Apple's up-selling of devices, including wearables, accessories, iPads, Macs, and Vision Pro, will represent about $97 billion of revenue in fiscal 2025.
Assuming 50%- 80% churn out implies that an additional 50%- 80% of $97 billion of revenue is dependent on the iPhone, which would add an incremental 12% %- 19%. In total, these numbers imply that 89%- 96% of Apple's fiscal 2025 revenue depends on the iPhone - a single product.
Apple's valuation should be partly based on its growth outlook, Martin says.
The analyst also flagged investor concerns over paying a 30 times fiscal 2025 price-to-earnings multiple (P/E) for Apple. The Cupertino, California-based company's revenue grew 2% in fiscal 2024 and shrank by 3% in fiscal 2023.
The re-rating reflects investors' need for a safer liquid stock during 2025. Four big tech companies are splurging in large language models (LLMs) and other GenAI infrastructure. They include:
- Amazon.com Inc (NASDAQ: AMZN)
- Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG)
- Microsoft Corp (NASDAQ: MSFT)
- Meta Platforms Inc (NASDAQ: META)
Apple 2025 Revenue Is Reliant On The iPhone
Apple is shrinking its equity base by buying shares. The iPhone maker is also driving 11% EPS growth in fiscal 2025 and 12% in fiscal 2026. Apple has committed to achieving "net cash zero" from about $50 billion of net cash on its balance sheet on June 30.
Apple reported an operating cash flow of about $91 billion for the first nine months of fiscal 2024. This implies accelerating share repurchases, the analyst added.
The best way to think about Apple's valuation and pricing power is to consider its installed base: more than 1.25 billion of the wealthiest consumers in the world using over 2.2 billion active devices (as of Dec. 31, 2023) an average of about five hours per day.
The analyst noted that Apple aims to grow LTV (lifetime value) by increasing the average revenue per user and lowering churn levels by upselling its users on additional devices and services.
Over time, Apple has added new products and services that drive stickiness and ecosystem lock-in.
Of Apple's fiscal 2025 revenue of $420 billion, she projects that iPhone revenue will be $215 billion, or 51%. Apple says it has about 2.2 billion active devices and about 1.3 billion unique users, suggesting an average of about 1.7 iOS devices per user.
But the iPhone is the "anchor" product and millions of consumers own only an iPhone, as per the analyst.
Martin noted that 100% of services revenue of $108 billion in fiscal 2025 (i.e., 26% of total revenue) is dependent on owning an iPhone. Together, these two buckets imply that 77% of Apple's fiscal 2025 revenue is reliant on the iPhone.
Price Action: AAPL stock is up 0.71% at $228.08 premarket at last check Tuesday.