Apple finally launched its first 5G iPhones, namely, four different models of iPhone 12:
iPhone 12 ($799)
iPhone 12 Mini ($699)
iPhone Pro ($999)
iPhone Pro Max ($1099)
The iPhone SE (2020), iPhone XR, and iPhone 11 are still available for $399, $499 and $599 respectively.
Apple also introduced the HomePod Mini, a smart speaker, for $99.
However, I will argue that investing in Apple to profit from 5G iPhones is not really such a great idea for two main reasons.
Apple is not a phone company
As we can see from the last 10-K, 54% of the sales of Apple in 2019 came from iPhones but the real growth is coming from services. In the first 9 months of FY 2020, Apple generated $39.2 billion from Services.
The Smartphone market is saturated as most people in the Western World, Japan and China (the main markets of Apple) already own a smartphone. Apple failed to have the same impact in still fast growing markets such as India and Africa, and consequently, cannot expect to keep growing revenues and profits from iPhones. Apple and other smartphone makers have already reached the technological limit on smartphones, and can only improve through more features rather than real technological breakthroughs.
Therefore, Apple’s best bet is to leverage its brand, to keep the customers in its ecosystem and keep selling them more services. So far, it has been a working strategy as we can see both the revenues and free cash flow of Apple are increasing despite the headwinds in the industry.
Apple’s record high valuations
While Apple’s FCF grew by 13.8% annually in the last 10 years, its stock price grew by 27.3% annually. This bull run was sustained greatly by Apple buying back about one third of its shares outstanding. But as the valuations on the company keep rising, does it make sense for Apple to keep buying back shares?
Although, in the long-term, I will say that Apple is still a good (not great!) investment as they will probably buy even more shares if let’s say the stock price drops and they can always increase their dividends. But in the short-term (the coming years), a market selloff will without any doubt lead to a selloff in Apple stocks too as the stock is now highly correlated with the markets being owned by so many passive funds.
The best way to profit from these new iPhones would be to look at the suppliers of Apple. Apple can hardly maintain a FCF growth of over 10% a year even with services growing at such a fast rate. Buying back shares when they are at all time high is not something to be happy about. Therefore, we need to look at the suppliers. For example, Skyworks Solutions makes $18 for every 4G chip they sell. For 5G chips, they are going to make $25, that’s a 38% increase in revenues per chip. Even, if they were going to sell the same number of chips to Apple, they could still in theory increase their revenues by 38%. In practice, there are other factors to consider, but there’s no way, Apple can increase their revenues by 38% in a year even in the best case scenario.
Here's the full analysis of Skyworks Solutions on My Research Partnership along with my course for beginners with over 150 lectures: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/13607861