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Apple’s third quarter profits topped Wall Street’s estimates, but iPhone sales came in weaker-than-expected. So will 5G-enabled technology propel the latest iPhone to growth in 2021? Anthony Okolie talks with Vitali Mossounov, Global Technology Analyst, TD Asset Management about the bull and bear case for Apple.
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- Apple just reported third-quarter profits topping Wall Street's expectations. But iPhone sales came in weaker than expected. So will the latest 5G-enabled iPhones deliver results? Today, we look at the Bulls & Bears case for Apple. Joining me today is Vitali Mossounov, Global Technology Analyst with TD Asset Management. So let's look at the Bull case. Start with 5G.
- Tony, 5G, how long have we been waiting about 5G, right? We've been talking about it for years now. Well, it's finally here. We saw Apple announce four new phones, all 5G, just weeks ago. And as of right now, they're shipping. They're getting into people's hands. What the Bulls are going to say is that 5G for Apple is going to be that big supercycle that they've been waiting for, that record year that's going to drive record earnings, record sales. And it's going to propel the stock even higher.
- OK. Your next Bull case is replacement cycle.
- And this is a simple one but a powerful one. There's a billion iPhones out there or so. And the average iPhone user has had it in their hands for four to five years. So all Apple needs to do is have you change your phone every five years or so, on average. If you do that, they can sell about 200 million phones. Now, the last couple of years, they've actually been tracking below that. So the bar is really low. And even an incremental shortening of that replacement cycle helps a lot.
- And the third one, carrier promotions.
- And this is a sneaky one but a powerful one. A lot of people think about the iPhone as this $800 device in the US. In reality, everybody pays for this thing in installments, $30, $40 a month. And that can still be quite a lot for many people. Now, the carriers this year are doing everything in their power, it seems like, to help Apple. If you live in the US, Verizon can get you onto the latest iPhone for just $15 a month, or $10 a month if you're a new subscriber from another carrier. And AT&T, well, one of their promotions looks like it's going to get you the iPhone for free.
- So that's a Bull case-- now, the Bear case. First one, you say the stock is expensive.
- While the Bears say the stock is expensive-- and that's their number-one pushback-- they're used to seeing Apple sell luxury devices but trade at rock-bottom prices. That's no longer the case. Apple, now, has a luxury premium valuations. So the Bulls will say that that's deserved. But the Bears say, this is a dislocation. And it's only a matter of time until Apple trades back down to how it used to trade.
- And your next Bear case is visibility.
- Visibility, it's a funny one. We're here likely on the cusp of a pretty good iPhone cycle. And yet, investors are already looking forward. What comes next? So the Bears will say, sure, maybe there's a really good 5G cycle now. But what happens the year after? Don't we have to now compete, so to speak, against those prior-year numbers? And that's not going to be easy.
- What about disruption in the business model?
- Everyone, right now, is worried about regulation of big tech. And you saw the House Judiciary Committee call Apple a monopoly power. That scares everybody. And then even Apple's own ecosystem, you're having the maker, the developer of Fortnite, Spotify, and many other people that are in that Apple App Store ecosystem come out and say, we don't feel comfortable paying this $30 fee to Apple, which is a core part of their profitability.
- But for the Bull and Bear case, Vitali, how does this all net out for you?
- I think there's a couple of good points on the Bull side. There's a couple of good points on the Bear side. So both are worth reviewing and thinking about. I think the one that obviously stands out from the Bears is the valuations. So indeed, Apple used to trade at these below-market multiples, 15, 16-times earnings. Suddenly, here it is at 30. So you really have to sit back and ask yourself, do you believe in the sustainability of the iPhone? Do you believe that 3, 4, 7, 10 years from now this iconic device is still going to be the control board for our digital lives and even more?
If you think that's the case, then I think those valuations could easily be justified. However, the Bears will say again that the history of electronics does not justify that kind of path forward. And so it is this exciting debate out there. But over the next year, really, investors should probably focus more than anything on, how is this cycle shaping up? How is iPhone 12 doing? Is 5G driving replacement cycle? And is that sentiment around Apple, over the next year, moving up or down?
- Vitali, thanks for your insights.
- Thanks, Tony.
[MUSIC PLAYING]
- Apple just reported third-quarter profits topping Wall Street's expectations. But iPhone sales came in weaker than expected. So will the latest 5G-enabled iPhones deliver results? Today, we look at the Bulls & Bears case for Apple. Joining me today is Vitali Mossounov, Global Technology Analyst with TD Asset Management. So let's look at the Bull case. Start with 5G.
- Tony, 5G, how long have we been waiting about 5G, right? We've been talking about it for years now. Well, it's finally here. We saw Apple announce four new phones, all 5G, just weeks ago. And as of right now, they're shipping. They're getting into people's hands. What the Bulls are going to say is that 5G for Apple is going to be that big supercycle that they've been waiting for, that record year that's going to drive record earnings, record sales. And it's going to propel the stock even higher.
- OK. Your next Bull case is replacement cycle.
- And this is a simple one but a powerful one. There's a billion iPhones out there or so. And the average iPhone user has had it in their hands for four to five years. So all Apple needs to do is have you change your phone every five years or so, on average. If you do that, they can sell about 200 million phones. Now, the last couple of years, they've actually been tracking below that. So the bar is really low. And even an incremental shortening of that replacement cycle helps a lot.
- And the third one, carrier promotions.
- And this is a sneaky one but a powerful one. A lot of people think about the iPhone as this $800 device in the US. In reality, everybody pays for this thing in installments, $30, $40 a month. And that can still be quite a lot for many people. Now, the carriers this year are doing everything in their power, it seems like, to help Apple. If you live in the US, Verizon can get you onto the latest iPhone for just $15 a month, or $10 a month if you're a new subscriber from another carrier. And AT&T, well, one of their promotions looks like it's going to get you the iPhone for free.
- So that's a Bull case-- now, the Bear case. First one, you say the stock is expensive.
- While the Bears say the stock is expensive-- and that's their number-one pushback-- they're used to seeing Apple sell luxury devices but trade at rock-bottom prices. That's no longer the case. Apple, now, has a luxury premium valuations. So the Bulls will say that that's deserved. But the Bears say, this is a dislocation. And it's only a matter of time until Apple trades back down to how it used to trade.
- And your next Bear case is visibility.
- Visibility, it's a funny one. We're here likely on the cusp of a pretty good iPhone cycle. And yet, investors are already looking forward. What comes next? So the Bears will say, sure, maybe there's a really good 5G cycle now. But what happens the year after? Don't we have to now compete, so to speak, against those prior-year numbers? And that's not going to be easy.
- What about disruption in the business model?
- Everyone, right now, is worried about regulation of big tech. And you saw the House Judiciary Committee call Apple a monopoly power. That scares everybody. And then even Apple's own ecosystem, you're having the maker, the developer of Fortnite, Spotify, and many other people that are in that Apple App Store ecosystem come out and say, we don't feel comfortable paying this $30 fee to Apple, which is a core part of their profitability.
- But for the Bull and Bear case, Vitali, how does this all net out for you?
- I think there's a couple of good points on the Bull side. There's a couple of good points on the Bear side. So both are worth reviewing and thinking about. I think the one that obviously stands out from the Bears is the valuations. So indeed, Apple used to trade at these below-market multiples, 15, 16-times earnings. Suddenly, here it is at 30. So you really have to sit back and ask yourself, do you believe in the sustainability of the iPhone? Do you believe that 3, 4, 7, 10 years from now this iconic device is still going to be the control board for our digital lives and even more?
If you think that's the case, then I think those valuations could easily be justified. However, the Bears will say again that the history of electronics does not justify that kind of path forward. And so it is this exciting debate out there. But over the next year, really, investors should probably focus more than anything on, how is this cycle shaping up? How is iPhone 12 doing? Is 5G driving replacement cycle? And is that sentiment around Apple, over the next year, moving up or down?
- Vitali, thanks for your insights.
- Thanks, Tony.
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