Apple: Quality Name To Own; AR/VR To Drive Growth
Summary
- Apple is one of our favorite ideas entering 2022. We expect investors to rotate into quality names in the face of increasing interest rates and tapering of the stimulus.
- Apple is currently trading at 28.5x C2023 P/E versus the large-cap peer group of 34.2x. But Apple's earnings are GAAP, while much of large-cap peers' earnings are non-GAAP.
- Apple revenue growth will accelerate in C2022 and beyond, driven by the launch of AR/VR products. AR/VR products should drive the growth of higher-priced iPhone and Mac offerings.
- We expect Apple's share to hit $225 by the end of C2022 and $275 by the end of C2023, and $300 by the end of C2024.
- Apple should remain one of the top holdings for any tech investor. We urge investors to accumulate shares when opportunities are presented.
Nikada/iStock Unreleased via Getty Images
We are bullish on Apple's (NASDAQ:AAPL) prospects as we enter 2022, and we recommend investors buy shares here. As many Wall Street analysts forecast, we expect Apple stock to rerate quickly as the company launches new AR/VR (Augmented Reality/Virtual Reality) products in 2H of 2022. The AR/VR products will enable newer applications and services. These newer applications and services will trigger a demand for higher-priced and faster phone devices. We expect AR/VR to become the" killer app for the 5G" connectivity, driving a vigorous iPhone upgrade cycle.
In the near term, we expect Apple to report solid iPhone demand, as the lead cycles for higher-end phones have decreased significantly since the launch of the devices in September 2021. iPhone demand remains robust, and according to Morgan Stanley, Apple is on track to manufacture 82-million units during the quarter, despite inventory issues. We expect Apple to report solid upside in revenue and EPS when it reports results on January 25th. Appreciation in Apple stock will initially be driven by better-than-expected iPhone sales and a stellar increase in new subscriptions. Despite supply chain concerns, we believe iPhone shipments for the premium models could be better than expected, as many Wall Street banks indicated. This, in turn, will lead to better-than-expected revenue and EPS.
As interest rates are set to rise in 2022, we expect quality names such as Apple to weather the interest rate hikes better. We would not be surprised to see shares hit $225 within one quarter and hit $275 by the end of 2023 and $300 by the end of C2024. The following chart illustrates the path toward $300 by the end of 2024.
AR/VR headsets coming
Beyond the initial upswing in the stock, we expect Apple stock to be driven higher in 2022/2023 by the introduction of new AR/VR products. We believe AR/VR will be the next leg of growth for Apple. We expect Apple to introduce AR/VR headsets in 2H of 2022. AR/VR and Metaverse are becoming the new battleground, and we expect Apple to become a formidable player. Apple is likely to benefit disproportionately more than others given its strong platform and large installed base of users.
We are highly optimistic Apple will launch its AR/VR products around September of this year. We believe AR/VR functionality will drive demand for higher-performing phones, which will drive the demand for newer and faster phone devices. We expect the traditional iPhone upgrade cycle to accelerate and shorten, driving the growth for the company. Hence, we believe it is a strategic imperative for Apple to introduce AR/VR headsets as soon as possible to drive the growth for the company.
AR/VR likely to drive a stronger iPhone upgrade cycle
According to Morgan Stanley Research, the iPhone installed base is estimated to be around 1 billion units. AR/VR headset launch will trigger a wave of innovation in the application ecosystem for both consumers and business users. As applications become more feature-rich, the compute and network speeds require to serve these applications will increase dramatically. iPhones need to have faster processors and modems to make feature-rich applications work. Therefore, we expect AR/VR headsets to shorten iPhone upgrade cycles, leading to revenue and earnings momentum. In addition, we also expect switching to iPhones from Android devices to increase, leading to more significant momentum in iPhone sales.
AR/VR has become one of the top focuses
Apple has been feverishly at work on developing its AR/VR technologies, as evidenced by the number of patents the company filed. Many of these patents are in-process now, but many have already been granted. Some of the most exciting patents we reviewed are listed below.
The following image illustrates a patent Apple filed for the coming Metaverse.
Source: Patently Apple
Valuation
Apple is one of the few companies in tech that is profitable on a GAAP basis. Hence we value Apple primarily on a Price to Earnings (P/E) basis. Apple is relatively inexpensive when compared to the large-cap peer group. Apple is currently trading at a C2023 P/E ratio of 29x, well below the peer group average of about 35x. It is to be noted that many companies in the peer group are trading on a Non-GAAP basis with ample stock-based compensation taken out of the operating expenses. In other words, many of these companies will have even higher P/E multiples if normalized for stock-based compensation. Therefore, Apple is a steal when compared with the large-cap peer group. Therefore, given that we are in the era of increasing interest rates, we would be overweight, high-quality names such as AAPL. The following chart illustrates Apple's valuation.
What to do with the stock
We are bullish on Apple, and we are buyers of shares here. We are confident Apple will likely report stellar numbers when it reports results on January 25th. We expect the stock to rally into the quarter as many analysts raise their price targets on better than expected demand for iPhones. We also expect the company to report solid Mac shipments. Given our confidence in Apple's ability to innovate, consistently churn out hit products, expand its services offerings, we believe the estimates are likely conservative. We expect the company to raise them through the year. We also expect the company to continue to buy copious amounts of shares, providing support for the stock. Therefore, we would be sticking with Apple through thick and thin and buying shares on any weakness.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in AAPL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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