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Investment Thesis
Based on Bloomberg, Apple (NASDAQ:AAPL) may be offering a new subscription service for its products, while also allowing device upgrades to its newly launched models. Though some may think that the subscription plan will help the company gain more market share from the Android segment, we have differing thoughts, given the high rates of AAPL device ownership in the US.
To date, Android phone users accounted for over 70.97% of all smartphones used globally. As a result, we doubt a new, renamed “subscription plan” will entice non-AAPL phone users over, due to numerous reasons such as the customizability of Android phones and incompatibility of certain software. In addition, for other AAPL products, such as MacBooks and iPads, we also have to consider other reasons beyond its price point, such as users’ preference for Windows products and the superior performance of gaming laptops from other brands.
In the meantime, we encourage you to read our previous article on AAPL, which would help you better understand its position and market opportunities in the advertising segment.
Why Apple’s Subscription Plan May Not Aid Its Revenue Growth
While we are uncertain of AAPL’s subscription plan, many do not hold the same view as us, given how the stock rose by 1% on 24 March 2022 post new release. Despite what Bloomberg outlined in terms of aiding product adoption in price-sensitive markets, we have observed many AAPL users turn to network carrier plans for iPhone subsidies, credit card payments, and secondhand markets. In addition, AAPL has previously launched multiple similar services in the US: installment plans through Apple Card, iPhone Upgrade Programme for new iPhones every year, Buy Now Pay Later (BNPL), amongst others. These offer a mix of financing plans for consumers looking to purchase AAPL’s devices at a more affordable monthly rate than the one-time full fee.
The fact that the US is a wealthy country helped push adoption to over 41.9% in the country YTD, representing the largest market for AAPL products globally. Nonetheless, due to its popularity, its market penetration in the US could have hit a plateau point, and we are uncertain how the subscription plan could aid its sales and growth moving forward.
However, we also note that the proposed subscription plan applies to all other AAPL products, including the iPad, MacBook, Apple Watch, etc. As a result, we may expect a potential uptick in adoption, though not massive, given how the iPhone accounts for 52.5% of its sales in FY2021. Bloomberg themselves has likened the plan to an auto-leasing program, depending on how AAPL structures the monthly financing plan.
Nonetheless, an additional monthly payment plan may overstretch more Americans’ wallets with multiple payments, such as mortgage fees, auto payments, gas and electricity, student loans, etc, given that the average American household owes approximately $155K in loans by the end of 2021. Moreover, given that AAPL products have always been selling at a premium over other brands, there is no question that even a monthly fee would not be that affordable.
On the other hand, AAPL could potentially cut away the middlemen from the network carriers in the US and globally. The assumption is that these carriers buy iPhones in bulk at a discount and resell them to consumers at a higher price, to earn the difference in profit. As a result, AAPL’s new plan could be aimed at earning the carrier’s profit, further boosting its revenue. However, iPhone consumers in the US have historically relied on network carriers for SIM cards, authentication, and credit check, before their device transaction could be approved.
However, interestingly, AAPL went off tangent for its latest iPhone SE from 29 March 2022 onwards. The new sale process of the low-end models does not require this credit verification step, which gives the company more control over its pricing (installment or full price), customer service, and experience. This one-off strategy could very well be AAPL’s first foray into its new financing plans, such as the rumored subscription plan for all of its later devices, including the iPhone 14 launching later in 2022.
However, in doing so, AAPL opens itself up to the risk of revenue realization as over a third of Americans have missed their BNPL payments as of 2021. The BNPL wave took over the US and globally in 2020 during the heights of COVID-19, prompting a massive shift in consumers’ shopping habits and credit risks. With an ongoing probe on BNPL companies since December 2021, it is evident that the US government is concerned about how consumers are pushed into buying products they cannot afford.
Why AAPL’s Subscription Plan May Work In Its Favor
The advent of 5G technology and increasingly powerful software updates will eventually require enhanced computing power from newer chips. In addition, newer apps and latest software updates also require newer iPhone versions with additional storage bytes. As a result, the subscription plan could promote more of AAPL’s existing users to upgrade to its newer (and more profitable) devices with enhanced technology, thereby increasing its revenue moving forward.
With the subscription plan, the monthly entry fee would also be more enticing to AAPL’s ardent fans, given how its iPhone 13 cost over $700, assuming an upfront purchase. In addition, with AAPL known to phase out support and software updates for its “vintage” devices, (launched for more than five years), the plan may aid the company in welcoming back AAPL’s longtime users with older unsupported devices.
There may also be a potential upside in its AppleCare+ segment, attached to AAPL’s future subscription plans. Its consumers are more likely to buy into the “leasing insurance,” seeing how they could easily lose and/or damage their devices during the length of their plans. At the same time, AAPL may also achieve its sustainability goals faster, while lowering its manufacturing costs moving forward. By upcycling the primary manufacturing materials from the older unsupported devices, the company would be well ahead of its plans to be carbon neutral by 2030.
The subscription plan would also help ensure the return of AAPL’s devices, which may still be in perfect working conditions. As a result, the company could potentially refurbish its devices and resell them, boosting its market share in developing countries. Conventionally in price-sensitive markets, AAPL’s products have been mainly out of reach from most of the population. However, given that many of its older devices are already in circulation in countries like India and Indonesia within the secondhand market, its upside potential is more in the one-time sale/ subscription fee directly contributing to its revenue for these older devices, instead of on its App Store revenue.
In addition, many phone makers, including AAPL and Samsung, are pushing for eSIM technology, which allows customers to activate cellular plans without the need for a conventional physical SIM card. The move dramatically reduces the reliance of phone makers on the network carriers for the purchase process, thereby allowing the former to directly sell to consumers instead. With AAPL’s new iPhone 13 already offering the eSIM technology, we may expect AAPL to consolidate more gaps in the phone purchase processes moving forward.
Assuming domestic success and adoption in the phone subscription plan and eSIM technology, AAPL may potentially push for the strategy to be exercised globally as well, effectively cutting off all network carriers from now on. The strategic move may potentially boost AAPL’s revenues and growth moving forward, assuming competent execution and widespread adoption.
So, Is AAPL Stock A Buy, Sell, or Hold?
Since our last article, AAPL’s stock price has risen by 14.51% from $152.58 on 24 February, to $174.72 on 25 March 2022. AAPL is definitely a solid stock, however, it has recovered quite a bit and is trading at a growth premium now. As a result, interested investors may want to wait for a slight retracement before adding to your portfolio.
Nonetheless, we recommend aggressive investors to add still, given that AAPL is expected to report robust revenue growth. For FY2022, consensus estimates that AAPL will report revenues of $395.15B, representing YoY growth of 8%. In addition, AAPL is expected to grow its revenues at a CAGR of 5.39% over the next three years. These numbers suggest that though AAPL is a maturing company with decelerating revenue growth, it is still a solid stock with favorable upside potential ahead. Assuming excellent execution, the subscription plan could very well boost its revenues over time.
As a result, we iterate our Buy position for AAPL.
