Apple's investment paradigm is shifting, as evidenced by the stock’s recent, steady rise.

Shares are up 13% since Apple reported earnings on July 31st (6% on the report and 7% in the 14 trading days since).

— Deepwater Asset Management (@deepwatermgmt) August 22, 2018

• Apple’s investment paradigm is shifting, as evidenced by the stock’s recent, steady rise.
• Shares are up 13% since Apple reported earnings on July 31st (6% on the report and 7% in the 14 trading days since).
• Skeptics of the Apple as a Service paradigm shift attribute the stock’s run to the anticipation of new iPhones this fall.
• Prevailing view: it’s a product cycle story. History supports this view — over the past 4 years, shares of AAPL have increased, on average, 4.1% from Aug. 1 to Sept. 1 in anticipation of new iPhones. Shares have fallen an average of 1.7% between mid-Sept. and mid-Oct.
• Emerging view: Apple as a Service. Stable iPhone business, Services growth, a significant capital return, and new products.
• We expect the stock to continue its move higher after the iPhone announcement this fall, driven by the Apple as a Service paradigm shift.
• The Jun-18 quarter represents the 8th consecutive quarter of stable y/y iPhone growth. Average growth over the past 8 quarters has been 1% y/y.
• We believe Apple will retire one-third of outstanding shares over the next 3 years, compared to investor expectations of 5+ years. That buyback alone could lift shares by 22%. We explain the mechanics here.
• Factoring in the buyback, 7% EPS growth, and Apple’s current 15.8x forward multiple suggests a $300 per share price in 2 years. Assuming the paradigm shift yields a higher multiple (18x) implies a $340 per share price.
• Apple’s strong and expanding relationship with its customers is underappreciated by investors, but foundational to future appreciation of Apple’s market cap.

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making any investment decisions and provided solely for informational purposes. We hold no obligation to update any of our projections and the content on this site should not be relied upon. We express no warranties about any estimates or opinions we make.