Apple (NASDAQ: AAPL) ended last week on a high as the market once again extrapolated too far a new supply of products. The latest report says the tech giant is working on a subscription plan for iPhone and other hardware products, although similar monthly payment options already exist. My investment thesis remains bearish on the stock with the market constantly needing to find reasons to pay high prices for Apple despite a difficult trajectory for stock gains over the next few years.
Monthly payments are nothing new
Since the iPhone’s initial launch in 2007, consumers have rarely been forced to pay the full price of the expensive smartphone upfront, if at all. From wireless carrier subsidies to monthly payment plans and even Apple installment loans, people aren’t shelling out more than $1,000 at the checkout or cash register to get an iPhone.
According to Bloomberg, Apple is working on a subscription plan for iPhones and other hardware, iPads and Macs, charging a monthly fee. The company could possibly bundle a hardware subscription with other discounted services, such as Apple Music or Apple TV+.
While a hardware subscription service would tie more consumers to Apple products over the long term and provide a direct connection to the consumer, users aren’t exactly asking for such an option. The tech giant might be required to offer a bundled discount to offset wireless carrier discounts such as those from Verizon Communications (VZ) offering $800 off a second phone plus transfer fees from another carrier.
Remember that Apple is not trying to sell $40/month wireless service to these iPhone owners against multiple competitors. The tech giant entices people to sign up for subscription services because of the value of the product, not the discounts offered for signing up.
Apple already offers its customers the option of paying for the hardware through a 12 or 24 month installment plan as well as a trade-in discount or monthly payments through the Apple Card. A prime example is the new Free Mac Studio to consumers via 12-month installments of $150 for the low-end product and $300 for the high-end product.
The tech giant could certainly develop a subscription service to offer customers the option to automatically upgrade to a new iPhone or Mac with each annual release. These customers would have to pay higher fees than the current monthly fee or pay the monthly subscription well beyond a current cycle where customers replace iPhones every 3-4 years.
A 9to5Mac survey from earlier this year suggests that only 52% of consumers upgrade an iPhone within 2 years. Many people are now delaying upgrades for 3-4 years and saving a significant amount of money compared to paying for a new iPhone every 2 years.
More searches by BlinkAI about a year ago I found that 34% of iPhone users plan to keep their iPhone beyond 3 years before upgrading. According to this study, nearly 60% of iPhone owners took at least 24 months to upgrade.
Either way, many consumers are now extending the iPhone upgrade cycle from traditional 24-month cycles, as wireless carrier subsidies reduce Apple’s revenue potential. These consumers pay off iPhone installment plans with Apple or wireless carriers and save money with the smartphone still working properly for longer.
These consumers seem very unlikely to suddenly join a subscription plan that requires additional long-term costs and an absence of potential subsidies from mobile operators. Of course, some customers who upgrade every year may find that a monthly subscription is the best way to get a new iPhone or iPad every year.
Essentially, Apple should provide a financial incentive for users to upgrade more often with many current options for monthly payments. Any discount wouldn’t necessarily make more money for Apple, since consumers are already in a good enough position to buy iPhones.
As my previous research has indicated, Apple getting into AR/VR devices and electric AV or now possibly hardware subscriptions isn’t necessarily a boon for a company with $400 billion in annual revenue. Analysts aren’t raising earnings or EPS estimates as quickly as the stock is rising.
Even after a big quarterly beatdown at FQ1’22, Apple will struggle to generate even 5% revenue growth annually over the next 3-year period. The tech giant beat revenue estimates of $5.4 billion for 11.2% growth and EPS estimates of $0.21, but analysts only raised revenue estimates for the 22 than 8.2%.
The market just doesn’t seem to get the trend that FQ2’22 revenue is only expected to grow 5.1% from 11.2% in the December quarter. My previous post pointed out that Apple didn’t beat EPS lenses by a wide margin before Covid.
Market normalization should bring quarterly earnings back to that normal range, where a revenue growth forecast of 5.1% leads to actual reported revenue growth of no more than 6.0%. The market still thinks Apple will crush these growth rates when history suggests otherwise.
Apple climbed near all-time highs, but FY22 EPS target remains at $6.16. The stock trades at 28 times those EPS targets. Worse still, the tech giant is trading nearly 27x FY23 EPS target of $6.55.
The main takeaway from investors is that the AR/VR device and likely hardware subscriptions in the future are not going to increase analysts’ current net targets. Apple remains far too expensive for projected financial targets, especially since the normal-time trends for these targets are close to reported actual numbers. The price of stock just doesn’t match this reality while not every hot new product will move the needle.