Valuentum Exclusive Analysis for the Discerning Investor

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Image Shown: Shares of Apple Inc, a holding in both our Best Ideas Newsletter and Dividend Growth Newsletter portfolios, have surged higher year-to-date. We see room for additional capital appreciation upside.

By Callum Turcan

We continue to be huge fans of Apple Inc (AAPL), and shares of the tech giant are included as a holding in both our Best Ideas Newsletter and Dividend Growth Newsletter portfolios. Our fair value estimate for Apple sits at $140 per share, comfortably above where shares of AAPL are trading at as of this writing, indicating there is room for meaningful capital appreciation upside. Additionally, shares of AAPL yield a modest ~0.7% as of this writing, and we view its forward-looking dividend growth trajectory quite favorably, though please note Apple also allocates a significant amount of capital every fiscal year towards share repurchases.

Apple’s long-term growth runway is underpinned by its incredibly lucrative and growing ‘Services’ business segment (which among other things includes its Apple TV+, AppleCare, iCloud, Apple Pay, and Apple Card offerings). This segment was the source of ~22% of its GAAP net sales and ~39% of its GAAP gross margin in the third quarter of fiscal 2020 (period ended June 27, 2020). Please note Apple’s Services business segment carries gross margins in the high 60s area (~67% in the fiscal third quarter, ~64% during the first three quarters of fiscal 2020), while its ‘Hardware’ business segment carries gross margins in the high-20s low-30s area (~29% in the fiscal third quarter, ~32% during the first three quarters of fiscal 2020).

During the fiscal third quarter, Apple’s Services business segment posted 15% year-over-year net sales growth, outpacing the 10% year-over-year net sales growth posted at its Hardware business segment. Over time, we expect the revenues generated by Apple’s Services business segment to continue to grow in both nominal terms and as percent of the company’s total revenues. 

Moving Deeper into the Financial Tech Space

In August 2019, Apple launched its Apple Card offering in the US, a co-branded credit card. Goldman Sachs Group Inc (GS) is acting as its issuing bank and with Mastercard Inc (MA) providing payment solution services. We are big fans of the financial tech space given the secular growth tailwinds supporting the industry, among other things (e.g. high-margin revenues, relatively modest capital expenditure requirements).

Apple bills the Apple Card offering as “a new kind of credit card created by Apple and designed to help customers lead a healthier financial life.” Customers have access to the types of cash-back deals they would normally get with a traditional credit card issued by a major bank. Apple Card customers can pay via Apple Pay, a cashless payment service (a digital wallet), or with physical “titanium Apple Card” that Apple can send to its customers. Please note Apple Pay represents Apple’s core financial tech business, which should benefit over time from the launch of its Apple Card offering.

The tech giant is steadily building out its financial tech services business, and we appreciate the moves management has been making on this front. For reference, Apple launched its Apple Pay service in September 2014. Management has not provided a ton of information on the success of these services, though during Apple’s latest earnings call, Apple’s management team mentioned that they were “very happy with the number of people that have Apple Card” in response to an analyst’s question. Additionally, management noted:

“In June, we launched Apple Card Monthly Installments for more products in our US stores allowing customers to pay for their devices all the time with 0% interest. We're very pleased with the level of customer interest this new offering has generated.” --- Luca Maestri, CFO of Apple

Leveraging and integrating its various operating units to grow its overall business represents another reason why we are big fans of Apple. There is a lot of room for upside as it concerns Apple Card and Apple Pay, and we are optimistic Apple will be successful in cross-selling financial and financial tech services to its enormous product user base.

Concluding Thoughts

Reportedly, Apple is getting ready to launch its first-ever 5G-capable iPhone later this month, which would act as a very powerful near-term growth catalyst for the company. Longer term, Apple’s growing Services business segment is what underpins its growth story and its foray into the financial tech space is part of that strategy. We are excited for what the future holds for Apple and continue to big fans of the name. Our fair value estimate stands at $140 per share; the stock is trading at $115 at the time of this writing.

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Banks & Money Centers Industry – AXP BAC BBT BK C DFS FITB GS HSBC JPM KEY MS NTRS PNC RF STI TCF USB WFC

Computer Hardware Industry – AAPL BB HPQ IBM TDC

Financial Tech Services Industry – MA MELI PYPL VRSK V

Internet Content & Services Industry – GOOG GOOGL BIDU FB JD TCEHY TWTR

Software Industry – ADBE ADSK EBIX INTU MSFT ORCL CRM

Related: SPY, QQQ, IYG, IPAY, IYF, XLF

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Callum Turcan does not own shares in any of the securities mentioned above. Apple Inc (AAPL), Alphabet Inc (GOOG) Class C shares, Facebook Inc (FB), Microsoft Corporation (MSFT), PayPal Holdings Inc (PYPL) and Visa Inc (V) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Apple, Microsoft and Oracle Corporation (ORCL) are all included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.