Apple-As-A-Service: The Fruit's Recipe For $1 Trillion Market Cap

Apple Inc AAPL’s stock has always traded at a relatively low multiple for such a profitable company. The stock’s current PE ratio sits at just 10.4.
 

Bernstein analyst Toni Sacconaghi believes that he knows why the market discounts Apple and has a creative potential solution to unlock value. According to Sacconaghi, the market is wary of Apple because it is in the hardware sales business. Hardware comes with an inherent list of long-term threats, including elongating replacement cycles, falling prices and shrinking margins.
 

Instead of relying on customers to make a single $720 hardware purchase every two years, Sacconaghi thinks that Apple should think more like Netflix, Inc. NFLX.

“Along these lines, we explore an intriguing proposal in this note: what if Apple offered its products to customers not as a set of stranctional products, but as a bundled monthly service (i.e., Apple-as-a-Service)?” he asks.

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Sacconaghi argues that investors are already fearing saturation of the iPhone market, a phenomenon which led to the downfall of Motorola Solutions Inc MSI, BlackBerry Ltd BBRY and Nokia Corp (ADR) NOK.

Sacconaghi calculates that the cost of owning and using an iPhone currently averages out to about $3/day. He believes Apple customers could ultimately get more services from an Apple subscription bundle at less of a monthy cost than their cable/Internet bills.

If Apple could successfully make the transition to a subscription model, Sacconaghi predicts the stock could eventually re-rate from an 11x multiple to a 28x multiple, providing massive additional upside.

Bernstein has an Outperform rating on Apple and a $135 price target for the stock.

Disclosure: the author holds no position in the stocks mentioned.