Apple (AAPL) Upgrade Program Called 'Big Deal' at UBS; Worth $200/Share as Annuity Business

With the unveiling of the latest iteration of the iPhone, Apple (NASDAQ: AAPL) announced a new iPhone upgrade program. The program provides members with a new iPhone every year plus AppleCare coverage starting at $32.41/month. The new Apple program is similar to programs offered by carriers. UBS analyst Steven Milunovich believes the program could be a "big deal."

Milunovich cited two positives: (1) customers should upgrade more often, boosting revenue even taking into account more used phones hitting the market; and (2) the iPhone begins to look more like an annuity and less like a hits business.

"The result could be both higher EPS and a better multiple as iPhone revenue becomes more sustainable," he said. "Apple will discuss the accounting impacts on its Sep quarter earnings call, but we assume no dramatic change in revenue recognition."

With the program Apple is threatening the carriers' lock-in, although UBS's telecom analyst John Hodulik expects the
near-term impact on the carriers to be limited. The cost of Apple's upgrade program is largely in-line with the installment plans offered by VZ/AT&T when factoring in insurance fees while Sprint and T-Mobile's flagship leasing offers are cheaper option. Meanwhile, the carriers' activation fees ($15 at AT&T/T-Mo, $36 at Sprint, and $40 at VZ) will likely deter users from constantly changing providers. Over the longer-term, Hodulik worries that Apple's disintermediating the carriers could pressure revenue trends, potentially squeezing the providers to a wholesale model.

Overall, the net impact of the leasing and used iPhone supply should be positive. "Assuming 15% of the US installed base participates in the Upgrade Program, we see an incremental 9mn iPhone units shipping in F17, contributing $0.36 to EPS or roughly 3-4% EPS growth," the analyst commented. "The offset could be more used phones on the market. We estimate that there are 45-55mn secondary iPhone users, growing by 5-7mn each quarter. Although some users may choose to purchase a used rather than new phone, we believe the next effect will be positive, especially in the long run as more emerging market users join the iPhone ecosystem. We provide Gazelle's view of the used market."

Milunovich turned to colleague Gareth Jenkins to calculate what Apple would be worth as an annuity business . He calculated the stock could be worth over $200.

"Although customer use of the Upgrade Program will occur gradually, investor perception that the growth and consistency of iPhone revenue are improving should benefit the stock," Milunovich concluded. The firm reiterated a Buy rating and price target of $150.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $115.31 yesterday.

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