Apple Services: A Giant Is Growing Within Apple Inc. (AAPL)

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Valuing Apple’s Services Business

Apple Inc. (NASDAQ:AAPL) stock is currently trading at a PE multiple of 14.09, in line with the valuation multiples of other hardware companies like HP Inc (NYSE:HPQ) (2) and QUALCOMM, Inc. (NASDAQ:QCOM). However, the Apple services segment is significantly different from a ‘hardware’ business, whether in terms of operations or associated cost structure. It would, therefore, be more accurate to evaluate the segment as a services business in order to gauge its ‘value.’ Two popular companies which generate a ton of services revenue are Alphabet Inc (NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB).

Alphabet stock currently trades at a PE ratio of 29.56X while FB stock trades at an earnings multiple of 45.3X. Valuing Apple’s services business at these multiples puts the worth of the business between $287B – $441.2B ($24.35B*0.4*PE multiple). However, the services segment’s growth profile is closer to that of Google (YoY growth of around 20%) and hence, a 25X earnings multiple (below Google’s nearly 30X multiple for conservatism) would be a more accurate valuation of Apple’s services business, in our opinion, which puts the value of Apple’s services segment at $243.5B. (See also: Apple Stock: Will Apple Inc. (AAPL) Stock Regain Momentum In 2017?).

Conclusion

The $243.5B valuation compares against Apple Inc. (NASDAQ:AAPL)’s market capitalization of $622.5B (based on December 23 closing price). Excluding the service business share from Apple’s FY 2016 profits puts Apple’s ex-services PE multiple at 10.5X, which is significantly lower than the company’s 5-year and 10-year average earnings multiples. This leads us to believe that the market is currently undervaluing the potential of Apple’s services business, which could drive meaningful upside in AAPL stock price through multiple expansion.

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The article Apple Services: A Giant Is Growing Within Apple Inc. (AAPL) originally appeared on amigobulls.com. Watch our analysis video on AAPL

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