AAPL Stock Forecast: Wall Street Was Wrong About iPhone X

 The article was written by Hieu Nguyen, a Financial Analyst at I Know First.



“Here’s a company with, whatever their earnings are, $60 billion, and you can put all their products on a dining room table. Nobody buys a farm based on whether it’s going to rain next year, they think it’s a good investment over 10 or 20 years.” “– Warren Buffett


  • Apple Q2 2018 Results: Tim Cook one more time proved that he was right
  • Where is the future of iPhone?
  • Three different valuation methods all agree at a long-term Buy recommendation for Apple

(Source: Wikimedia Commons)

Q2 2018 Results: Tim Cook one more time proved that he was right.

On May 2nd, Apple Inc. (NYSE: AAPL) released its quarterly report. Apple’s net sales have grown 15.58% quarter over quarter, and 13.85% compared to the last 6 months. Although the gross profit margin dropped by 61 basis points, net income and EPS jumped up by 25.32% and 28.44%, respectively. A major contribution for the strong growth is iPhone sales. Despite of the fact that Wall Street considered iPhone X to be pricey, its performance is still very impressive. iPhone unit sales slightly increased by 3% but thanks to the increase in price, the total sales increased by 14%.

On the other hand, Mac witnessed a stable revenue from Q1 2017. The premium laptop from Apple has been facing with competions from other premium brands such as HP Spectre, Lenovo ThinkPad, or Dell XPS. Furthermore, earlier this month, Apple admitted its faulty MacBook keyboard. In 2015, Apple launched a new keyboard that Apple claimed to be 40% thinner. However, customers began to report problems with this type of keyboard, forcing Apple to fix the keyboard, free of charge.

About services, Apple reported a 31% growth rate in this segment. Thanks to the deferrals and amortization of the software, Apple services revenue is expected to continue to increase at a double-digit growth rate. According to Fortune, over the first quarter, Apple shipped 600 thousand HomePod along with 8 million Apple Watch. Despite a strong growth of more than 55%, both sales and unit sales of Apple Watch are far below the three main products: iPhone, iPad, and MacBook.

Where is the future of iPhone?

It has been more than 7 years from the day that Steve Jobs left Apple. In fact, with remarkable successes of the first four iPhone generations, Steve Jobs has set a very high bar for his successor, Tim Cook. Since then, every time Apple released their new iPhone, users have not been surprised the way they had been in the first 4 iPhones.  As we can see from the table under, there were not many developments since iPhone 6S. The most significant improvement is the Face ID technology in iPhone X.

However, both of the sales and number of unit sold have continued to grow year over year. Since 2012, after Steve Job left Apple, it has grown 13.8% in sales and 10.8% in unit sold. Since it was release, iPhone X has been considered to be too pricey and Wall Street expected the slow down of the revenue. It turned out that iPhone revenue still grew at 14% in the first two quarters. Moreover, customers are still very happy about their premium smart phone. According to Luca Maestri, Apple’s senior vice president and CFO: “The latest survey of U.S. consumers from 451 Research indicates that across all iPhone models, the customer satisfaction rating was 95%, and combining iPhone 8, 8 Plus and iPhone X, customer satisfaction was even higher, at 99%.”

On the other hand, Apple has been facing a tremendous competition. Undoubtedly, Apple in general and iPhone in particular has been a technology symbol all over the world. Although they are still one of the market leaders, the expansion of other brands especially in Chinese market are considerable. Since iPhone is the strongest brand of Apple, the company needs to renovate its product if it does not want to be surpassed by the competitors.

The War of Artificial Intelligence: Siri is far behind Google Assistant, Alexa, and even Cortana

Apple HomePod’s market share is far below Amazon Echo and Google Home. According to Fortune, HomePod only has 3% of the market share while this number of Amazon Echo and Google Home are 55% and 23%, respectively. Apple is also struggling with HomePod marketing. When Amazon Echo is considered an online shopping assistant and Google Home can answer almost all of your questions, Apple tries to market HomePod as a music reinvention. However, so far, Apple has not succeeded with this strategy.

Moreover, Siri is considered not as smart as the its competitors. Based on a research from Stone Temple, while being asked 5000 questions, Google Assistant tried to answer 75%, Cortana tried two third, Amazon Alexa tried about a half, while Siri could only try 40%. Besides that, in May 2018, to dominate the AI assistant industry, Microsoft Cortana has co-operated with Amazon Alexa. While Cortana can help users during their working time, Alexa will assist them during their free time. In another move, Google also showed how their AI assistant can make a real phone call. As a result, if Apple’s engineers will do nothing, Siri will be out of the AI game sooner or later.

(Source: Wikimedia Commons)

3 methods of Valuation all agree That Apple Stock Is Undervalued

DCF Valuation

Our 5-year DCF analysis arrives the target price of $207.95 for AAPL. DCF model was constructed based on 3 main factors: top line and bottom line forecast, capital expeditures, and WACC. Two third of Apple’s revenue comes from iPhone. However, as we analyzed above, the company is facing with a lot of difficulties to increase the unit sold. On the other hand, the price of iPhone X and iPhone 8 has already been high compared to the premium smart phones on market. Hence, we do not expect the sales to grow faster in the future. Morover, CAPEX is expected to grow at around 10% in the next five years.

The most three important factor that will impact the value of the company is iPhone sales, gross profit margin, and CAPEX. I ran a Monte Carlo Simulation with these three variables to see how the stock price will response to each variable. More than 73.18% of the result are within the Hold recommendation (within 10% of the current price) while 26.66% is a Buy recommendation

Dividend Discount Model

The second method to be used is Dividend Discount Model. Based on the 5 years historical data, Apple has used about 88%-94% of its net income to pay dividend and stock repurchase. As a result, we used two-stage discount model to calculate the value of AAPL. We assume that the company will not repurchase stock in the future but pay out dividend at the payout ratio of 91% net income. With the discount rate of 9%, the target price based on this method is $220.40, 19.18% upside. This method agrees with the previous method in a Buy recommendation in the stock.

Multiple methods

In fact, Apple is a unique company within its industry. Hence, it is no such a good peers that we can use for multiple method. However, we can compare Apple with the other big four technology giants include Alphabet, Amazon, Facebook, and Microsoft. As we can see, all of the P/E, P/B, and EV/EBITDA of Apple are lower than than the average of the other big four. We can not tell that just because the ratios are lower, the stock is expected to grow. However, Wall Street seems to undervalue Apple among the other technology giants.


Apple still one of the market leaders in both smartphone and laptop industry. Unlike Wall Street expectation, Apple’s Q2 2018 results showed strong growth in both sales and net income. The main contribution is from iPhone. However, all of the Apple products are facing with a lot of competitions, requiring the company to renovate. Using three different valuation methods, we agree on a BUY recommendation for the stock.

Current I Know First Algorithm Bullish Forecast for AAPL:

My recommendation is supported by the  I Know First algorithm bullish forecast for AAPL. On June 25th, 2018, I Know First issued a forecast for AAPL with a strong 1-year bullish signal of 150.20 and a very high predictability of 0.81. In addition, the signal gets better over the time. The prediction totally agrees with the above arguments about the future of Apple.


Past I Know First Forecast Success with AAPL:

On May 22, 2016, I Know First published a premium article saying that it’s time to Buy Apple’s Stock. I Know First has been bullish on Apple’s stock on all of the three time horizons. We suggested that Apple was undervalued by the time Warren Buffett went long for the stock. From the below graph one can see that in 1 year after the article, Apple stock price jumped up by 53.07% outperforming S&P 500 by almost 37%. I Know First algorithm successfully predicted the movement of the Apple stock price over all three period of time

(Source: Yahoo Finance)

Current I Know First subscribers received this bullish AAPL forecast on May 22, 2016.

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How to interpret this diagram

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