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October 13, 2019

The Age Of Subscription Means Higher Margins For Apple (AAPL)

By Dylan Callaghan

October 13, 2019

The tech giant we have all come to know. Love them or hate them they continue their trend upwards to the skies trading at prices never before seen in the history of the company.

Iphone orders have diminished in the last while, so why is the company trading at such high valuations?

Cooled trade talks ease things for Apple (AAPL)

The trillion dollar company is one of many that are front and center for the trade talks between China and the US. Trump eluded to possible positive resolution between the two nations trade which would obviously have a significant impact on Apple’s bottom lines.

Earnings per share increase with aggressive Apple stock buy-back program

The company is certainly under the gun when it comes to earnings, due to high dollar valuations. Even a negligibly sub-par quarter can spell a short-term disaster for the company that is currently sitting at a price/book of 11.10.

With that said, since 2016 Apple has been on an aggressive buy-back program of its shares, increasing its buy-backs by billions per quarter. Thus increasing earnings per share which analysts expect to rise in the coming year.

The age of subscription = higher margins

When we think about where we are now, in what we could call “the age of subscription”, we know that Apple has continued efforts in this direction and can create more value through higher margins for subscription based services that they offer.

So regardless of a dipped number in Iphone orders, we can watch the company make the transition into a services provider where higher margins can be enjoyed and likely make up for any temporary decline in tangible product sales.

Is Apple stock a good buy?

One of the great things about a company like Apple is that they are at the forefront of the technology sector, which will be a massive part of our future. It isn’t within a potentially dying industry by any means. They are a large enough company that funding for innovation and improvement is a non-issue and they should be able to easily adapt to changes in technology and the market.

Analysts seem to be expecting a slight increase next year in revenue, and the same for EPS expected to be 12.75 and currently sitting at 11.67 for this year.

The majority of analyst expectations point towards the company being a good buy at this point. Between 2016 and 2018 net income increased from $45.6 billion USD to $59.5 billion USD. The company’s trailing 12 months now sitting about $55.7 billion USD.

Yes we have to look at depressed Iphone sales, but see where the trade talks end up between the US and China, and the work the company is doing to increase market share within the services industry is worth taking into consideration.

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Dylan Callaghan


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