Bitesize: How to value Apple with Rask

Alec: [00:00:07] Welcome to Bitesize in Get Started Investing. In this series, we feature some of our favourite lessons, quotes and moments from the podcast. If you'd like to listen to the full episode, we've included the link in the show notes. [00:00:20][13.1]

Bryce: [00:00:23] So with a company like Apple, where you said at the start, it is so well covered that there are, you know, you could just jump online and get models from some of the best investment banks around the world, best fund managers, and get a valuation probably across the board. Yeah. So what are you doing in your model that you think they all have wrong? Or are you just tinkering with yours from five years ago? 

Owen: [00:00:46] Yeah. So I just tinker with mine every, you know, I probably jump into it maybe every 6 to 12 months. But when there's something that would materially change the thesis. So some people model quarter to quarter because the US companies report quarterly. I don't do that because I feel like the more time you spend in your model, the more likely you are to make a change with your investment. So I try and limit my exposure basically, like when you have your phone before bed you limit your exposure. For me, it's about when there's something that headlines like in a quarterly call or, you know, in a media release or even something in the industry, that's when it triggers me to be like, go back in. What was your assumption for that thing? Has it changed? And so, you know, one of those things recently is slowing services growth. Now, you would expect that we don't need a new iPhone every year. Some people do that. But most of us, I think the average life is between two and four years before people upgrade again. And there's a lot of switches. Most of the new acquisitions for Apple are switches, people that come across from the other ecosystems like Android. But you know, for the services revenue, if that slows, that's concerning because that means that the current usage of the current fleet of iPhones and Apple products maybe not as intended, like maybe not as expected. So I would expect that services revenue continues to grow double digits, probably between ten and 20% over the next five years in order to justify a valuation that might be above what analysts are expecting. 

Alec: [00:02:11] Now, the challenge with services revenue is that it actually is so many different business units within Apple that's just rolled up into this one number. It's Apple Music, It's iCloud. It's. Help me out here, guys. What are the subscriptions that are Apple TV who use Arcade Apple News. Yeah. 

Owen: [00:02:29] What costs potential.

Alec: [00:02:31] They have paid podcast subscriptions now. Yeah. So it's all these different business units working on different things. And for Apple, when they report, they just give you a services number. It's not like we have X number of Apple Music subscribers and X number of Apple Arcade subscribers. So then when it comes to modelling it, how do you actually do that work? Because modelling a subscription business isn't that hard. We spoke about it with Zero. It's Apple Arcade costs $4 a month and has a million users $4 million revenue a month, and then you do that for all of them. But if Apple aren't giving you a starting point, how do you even start saying here the service business lines, here's how much revenue they'll be making, here's how that rolls up. 

Owen: [00:03:11] Yeah. So there was a few like you said, they dropped the iPhone units. Well, we know the revenue and we can see the prices on the shelf in that store. So we could estimate roughly how many units are being sold so we can back the number out over time with the services. Revenue is much harder because these are basically launching behind closed doors like Apple News, for example, launched when services revenue was already bundled together. There was never a like you couldn't never see it separately like you could with the iPhone units. So basically what you rely on is you rely on a lot of like industry reports and surveys and these types of things that come through either investment banks or they come through like Bloomberg. Now, Bloomberg had this story probably about a year ago now where one of the things was like how much Google is paying to Apple to be installed in the Yeah. 

Alec: [00:03:57] To be the default search engine on the iPhone. Yeah. 

Owen: [00:04:00] Like the Internet Explorer back in the heyday from Microsoft and that estimate estimates are that could be as high as 50%. Now I don't think it's that high at the moment, but that's a huge number. If it's. 

Alec: [00:04:11] True. What do you mean, 50%?

Owen: [00:04:13] Lack of services revenue. Oh, wow. Yeah. So I don't think it's that high. But that could be something that we're looking at now. If there's a legal stoush or there's some sort of like regulation that comes in and says you need to give users more choice, well then maybe what happens? And that's probably more of a scary thing for, you know, everyone else. I think for most people like you, you want to have some understanding of that. They do disclose the number of subscribers, so they do describe it, disclose it. I think it's about 800 million subscribers at the moment. Such a huge number. 

Bryce: [00:04:44] Well, we hope you enjoyed that bite size. Now, if you're a beginner to investing or you have been doing this for a while and you're ready to take your next step, then why don't you try out one of our online courses? We've built these in partnership with Rask to help you learn about the nitty gritty of investing in shares from beginning to dividend. We've got two courses on offer. The first is out get started with an investing introduction course. It is free and the second is out Value Investor program, which is highly rated and gets you under the cover of value investing. 

Alec: [00:05:17] And that course comes with plenty of downloadable resources as well. You can do your own discounted cash flow or DCF analysis. You can research ASX or global companies using free and premium analyst tools. There's an investing checklist. There's so much more. 

Bryce: [00:05:33] This super comprehensive great course. So don't miss out on our special offer. Until the end of June, you can save $100 on the value Investor program by using the code EOFY. That's EOFY for $100 off. 

Alec: [00:05:46] Head to equitymates.com/online-courses. If you didn't get that, the link is in the show notes below. To find out more.