As tech markets become increasingly difficult to navigate, Apple Inc. (NASDAQ:AAPL)’s and Intel Corporation (NASDAQ:INTC)’s futures are pushing to hold. All while Gilead Sciences, Inc. (NASDAQ:GILD) is trading on the cheap and tries to escape its low growth.
2015 was a bumper year for both Google and Apple, but for very different reasons. The year saw Google smash Apple in the download stakes, hitting double the numbers Apple did. Despite all those additional downloads (and the attached overhead), Apple pulled away in trackable revenue.
The market is missing an important part of Apple’s potential when forecasting future stock value: how integral App Store sales are to Apple’s overall offering.
- China: China has catapulted to the third spot in iOS revenue territories and demonstrated 100% growth in revenue year-on-year.
- Monetization and Subscription: In the US, Apple saw downloads drop 20%, but revenues rose by 20%. This allows us to draw a picture of consumers who are more selective in what they download, but are also far more willing to pay for quality when they find it. Further to this is the rise of subscription services. […] people are willing to make long-term commitments to brands they like.
- Media Distribution Player: Apple generated $20 billion from it’s AppleCare, Apple Pay and Internet Services in FY 2015. [Google Play] has far greater reach and far lower revenue according to all industry pundits. We’re still forecasting 10% growth at the bottom line for Apple. As a result, we’re still very much long on the tech behemoth with a fair value of $146 – 52% upside to the current price. We’d recommend waiting for the market to react to this discount before wading in.
Gilead Sciences, Inc.
Last week, the collaboration deal was sealed between Galapagos NV and Gilead Sciences – bringing filgotinib into the Gilead stable.
Gilead agreed to pay $300 million in the form of an upfront license fee as well as $425 million for just under 15% ownership of Galapagos. Galapagos is eligible for payments of up to $1.35 billion in milestones, with tiered royalties and a profit split, if filgotinib is approved. This is a very expensive deal and a bit of a gamble, however, the potential for Gilead is massive.
The market is estimated to grow at a CAGR of 4.1% from $14.3 billion today to just over $19 billion in 2020. While it is a crowded market, filgotinib has demonstrated both effectiveness as well as a willingness to play well with other drugs. If this holds true through phase 3 it may take a rather large chunk of this growing ~$15 billion market relatively quickly.
We particularly like Gilead’s balanced approach to generating value. We see a clear three prong strategy to cash outside of normal value creating through operations / R&D.
Given the extremely low ~9x P/E and the ~8x P/FCF, Gilead is trading on the cheap, and we are forecasting relatively low growth of 4-5% over the next year. From there we expect to see a lot more growth, however, even with our low growth forecast we have a price target of $134.
Intel has had a rough ride over the past year with shrinking revenues, slowing data centre growth and weak guidance. The bad news looks set to continue with two new threats looming on the horizon.
- Qualcomm Threat: Last week, Qualcomm unveiled a new joint venture with the People’s Government of Guizhou Province. The agreement sees both parties ponying up $280 million a piece to a fund focused on building “world class server chipsets in China.”The move is well timed too as Intel has recently been blocked from shipping server chips into China by the US government on the grounds that it opposes current national security interests.
- Apple Threat: The rumor mill keeps grinding out ARM-based Macs on the back of their impressive performance gains. With Apple now making up 7.6 percent of the PC market – which is 59% of Intel revenue, a move away from Intel would effectively shrink Intel revenue by about 4.6% overnight. But that isn’t going to happen anytime soon. Apple certainly isn’t on a par with Intel’s mobile processing platform yet.
Our engine is forecasting 6.63% growth over the next year and, as such, we see Intel having a fair value of around $36. That’s a 24% premium to the current price, but we don’t see the company as a buy.
With erratic earnings and returns dipping, we’re maintaining our “hold” rating and suggest watching for signs that Intel is staving off the attacks before looking to enter.
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