Apple (Nasdaq: NASDAQ:AAPL) has lost more than 12% of its value since its brief stint in the $3-trillion market cap territory earlier this year. The stock’s declines have been largely in line with the broader market plunge this year due to a risk-off environment in global equities spurred by mounting macroeconomic uncertainties.
Yet, Apple’s growth outlook remains robust. This is corroborated by record-setting performance during the December-quarter despite weak consumer sentiment and protracted supply chain constraints, which continues to imply strong global demand for its offerings. The high volume of switchers and new customers identified during the holiday sales quarter across a wide range of products ranging from the Apple Watch to the iPhone also underscores how Apple remains a share gainer within the burgeoning tech industry. And Apple is also expected to benefit from the continuation of a strong multi-year upgrade cycle this year, which will likely further its sales momentum observed over the December-quarter as it readies for its biggest launch year ever with revamps anticipated across its breadth of product offerings.
With supply chain bottlenecks expected to ease through the year, and more new product launches on the way to support further market share gains across all product and geographic segments, Apple continues to boast one of the strongest growth stories in the industry. Paired with its strong balance sheet, Apple's stock remains one of the safest growth investments, especially under today’s increasingly volatile macroeconomic climate.
Despite pronounced supply chain constraints, Apple did not fail to impress during its largest sales quarter of the year. The tech titan posted record-setting results with better-than-expected growth observed across all product and geographic segments during the December-quarter, except the iPad due to a significant shortage of legacy nodes required. The results were largely in line with our field work findings over the holidays as discussed in a previous coverage, where the majority of stores saw robust demand for all products, especially the iPhone 13 and all-new M1-powered MacBook Pros, despite the lack of seasonal promotions. Meanwhile, those looking for iPads were largely disappointed due to the lack of inventory. However, most within this cohort were keen on making other product purchases that were eligible for gift card rebates during Black Friday, which helped to partially compensate for lost iPad sales during the December-quarter.
With the worst of supply chain constraints now over for Apple, those who were disappointed over the holiday season and left with another Apple product purchase instead will likely be turning in their gift card rebates for an iPad in the coming quarters. As mentioned in our previous coverage, Apple’s gift card rebate program during Black Friday was a prudent strategy. Not only does it help in attracting sales of adjacent products, but it is also effective in ensuring the additional inflow of future revenues instead of offering one-off discounts to customers that could be lost to competitors down the road. In addition to recouping demand from previous quarters that have not yet been satisfied yet in coming quarters as supplies improve, Apple’s recent introduction of the all-new M1-powered iPad Air is also expected to drive another boost for the segment. Products that have transitioned to Apple silicon over the past year have achieved strong customer satisfaction. Take the revamped M1 Max- and M1 Pro-powered MacBook Pro for instance – customers have been “[blown away] with its power, performance and efficiency”, with the segment observing a “record number of upgraders for the December-quarter”, as well as switchers, which underscores robust demand for improved products powered by Apple’s in-house designed processors.
Apple’s expanding margins also highlight its strength in navigating through the protracted supply chain bottlenecks in recent quarters, which have not only caused a shortage of components, but have also elevated the costs of everything from raw materials to labour and logistics. The company boasted a consolidated gross profit margin of 43.8% during the December-quarter, up from 42.2% during the September-quarter and 39.8% in the same period during fiscal 2021. The improvement was largely attributable to the increased mix of higher-margin services segment revenues, as well as improved cost management across all units.
The stark contrast of Apple’s blockbuster results to those of other tech peers that have “held back production and introducing new products in the wake of issues with the supply chain” continue to underscore the tech giant’s best-in-class strength in overcoming unprecedented business challenges. Apple has always been the last to suffer and the first to recover amid industry-wide headwinds, and it is no different when it comes to navigating through the ongoing supply chain disruptions, underpinning further market share gains ahead.
As mentioned in earlier sections, Apple is preparing for its largest product upgrade cycle this year, with multiple launches scheduled for debut over a series of keynote events throughout the year. The first of many took place Tuesday. Dubbed “Peek Performance”, the virtual launch event kicked off the current year’s upgrade cycle with the highly anticipated 5G-enabled iPhone SE as expected, paired with an all-new Mac desktop, Mac monitor, and revamped iPad Air:
1. 5G-Enabled iPhone SE: Apple unveiled the 5G-enabled iPhone SE Tuesday, marking the series’ first upgrade since 2020. The device saw a $30 increase to its sticker price to $429 in exchange for 5G capability, faster processing enabled by the A15 chip, an improved back glass, and enhanced camera features. On the exterior front, the upgraded iPhone SE’s design remains largely unchanged from its predecessor, keeping the “five-year-old configuration” of legacy iPhones that has yet to turn in the Touch ID home button for Face ID.
Although Apple has not historically disclosed the composition of iPhone sales by model, external research estimates the more affordable iPhone SE series to have accounted for at least 12% of the product group’s annual sales. More than three quarters of iPhone SE sales were generated from outside the U.S., indicating its budget-friendly appeal worldwide, especially in emerging markets. The trend is further corroborated by the iPhone’s appeal in China, of which the budget-friendly iPhone SE continues to play a critical role in – the iPhone family currently accounts for the “top four selling phones in urban China”, driving “strong double-digit growth in switchers on iPhones” in the region during the December-quarter.
As mentioned in our previous coverage, iPhone sales are expected to remain robust in coming years as global 5G device upgrades continue to gather pace. And the launch of a more affordable 5G-enabled iPhone SE is expected to better equip Apple in attracting switchers from “more than a billion non-premium Android users” and further its global market share in the smartphones category. It would also help Apple maintain its lead in the 5G competition against rival Samsung, which recently launched its own budget-friendly Samsung Galaxy S21 FE 5G to capitalize on rising opportunities stemming from non-premium upgrades. Consensus estimates are currently forecasting the upgraded iPhone SE to account for 30 million of about 245 million total iPhone shipments for fiscal 2022.
2. M1 Ultra-Powered Mac Studio: Apple also introduced an all-new Mac desktop, the Mac Studio, which features its newest in-house designed M1 Ultra chip. The newest addition to the Mac family continues to underscore Apple’s migration away from Intel processors in recent years. Apple cited the M1 Ultra as “the most powerful PC chip ever”, sporting “20 CPU cores, 64 GPU cores and up to 128 GB of RAM” to enable 7x faster performance than its predecessor, which is expected to draw favourable demand from creative professionals like app developers and video creators looking for computing power that can handle demanding workloads without compromising performance. The latest innovation within the Mac segment is also expected to bolster Apple’s leadership among the top five best-selling PC vendors, as foreshadowed by strong demand from both upgraders and switchers for the M1 Pro/Max-powered MacBook Pros as discussed in earlier sections.
3. Studio Display Monitor: On the complementary accessories front, Apple introduced a 27” Studio Display Apple Monitor, which serves as a lower-priced alternative to the current Pro Display XDR models. Starting at $1,599, the new Apple Monitor features a “5K panel, 600 nits of brightness, four I/O ports, and fairly impressive speaker, microphone and camera systems”. The more affordable alternative to the current $4,999+ Pro Display XDR models is unveiled at an opportune time. Increasing adoption of hybrid work environments in the post-pandemic era continues to fuel greater demand for high-performance external monitors in home offices, while the enterprise sector also hurries for one of their largest inventory upgrade cycles to accommodate employees who are returning to offices after working for two years under the shadow of pandemic-related mobility restrictions. Although Apple remains fairly new to the external display market, the breadth of its offerings in terms of performance and pricing makes it well-positioned for further market share gains ahead, especially through adjacent sales opportunities arising from creative professionals that are already using Macs.
4. M1-Powered iPad Air: As expected, Apple has transitioned another iPad device to the M1 chip – this time, the iPad Air. The upgraded device also includes 5G support and features the “Center Stage” camera that was first unveiled last year with the launch of the 2021 iPad Pro. As discussed in earlier sections, global demand for all iPad models remains strong and continues to outpace supply. Remote collaboration needs required during the pandemic-era marked an inflection point for multi-purpose tablets. The portable computing devices were one of the most preferred workstations, second to laptops, as they reliably accommodated the fast-evolving remote working and studying arrangements during the pandemic. And much of that demand remains today, as demonstrated by robust demand over the holiday season, which resulted in an early sell-out due to limited supplies. With continued migration to the M-Series chips across all iPad models, and improvements to component shortages, the segment is expected to draw greater demand in coming quarters. The upgrades are also expected to complement Apple’s diverse pricing and performance strategy for the iPad segment, which better caters to the wide range of user needs while also driving a greater volume of upgraders and switchers to the device over time.
In addition to a series of product upgrades, Apple’s Peek Performance presentation on Tuesday also unveiled new developments to its services segment. Apple TV+ will be making its “first major foray into sports broadcasting” through an agreement with MLB to stream Friday night games across eight countries once the 2022 season begins. The platform will also be streaming “MLB Big Inning”, which features game highlights, every weeknight and provide subscribers with “access to a 24-hour livestream with replays, news and analysis”. Paired with increasing customer traction to Apple’s award-winning original content over the past two years, which includes the popular comedy series Ted Lasso, the company’s higher-margin services segment is expected to deliver continued strength in growth in coming quarters, even as elevated pandemic-era “usage of digital content and services” start to normalize.
Apple is expected to roll-out additional Mac, iPad, iPhone and Apple Watch launches later this year. Similar to prior years, the company is expected to introduce the next-generation iPhone 14 sometime in the fall. Meanwhile, the Mac and iPad line-ups will continue on the broader refresh trend that involves a transition to the more powerful M-Series chips. All of which are expected to further fuel a multi-period upgrade cycle across all product segments for Apple, bolstering its valuation prospects ahead.
But the most exciting of all will be the long-awaited preview of Apple’s mixed-reality headset. Management has largely remained tight-lipped on the project, dodging questions related to AR/VR opportunities during recent earnings calls with talk about the increasing volume of AR-supported apps in the App Store instead. But there have been speculations that the tech giant is preparing for a preview of the mixed-reality headset before the end of the year, with sales to begin in 2023.
An official announcement for Apple’s foray in mixed reality opportunities will be a key catalyst for the stock, as the nascent technology continues to draw traction in recent months with increasing talks of the metaverse. Over the next five years, opportunities pertaining to the metaverse are expected to blossom into an $800 billion market, driven by a combination of software and hardware sales. This makes strong tailwinds for Apple, which does not only stand to capitalize on growing metaverse opportunities through the sale of its impending AR/VR headset, but also adjacent revenues pertaining to the usage of related apps, software and service platforms. Preliminary projections are expecting Apple’s foray in mixed reality opportunities to boost its valuation by at least $150 billion. And over time when metaverse trends continue to gain mainstream traction, Apple is expected to generate more than $200 billion in annual revenues from the AR/VR segment, which underscores further upside potential for the stock over the longer term.
Adjusting our previous forecast for Apple’s better-than-expected December-quarter financial results, March-quarter guidance, and recent developments to its growth trajectory as discussed in the foregoing analysis, the tech titan is expected to generate consolidated net sales of $406.9 billion for fiscal 2022. This would represent growth of 11% from the prior fiscal year. And over the longer-term, Apple’s consolidated top-line is expected to further expand towards $578.4 billion by fiscal 2026, driven by sustained growth across its product segments, and increasing strength across its higher-margin services segment.
Paired with Apple’s cost structure, which takes into consideration an increasing mix of higher-margin services segment revenues, growing product sales volumes, and easing supply chain constraint-related cost pressures over the longer-term, the consolidated business is expected to generate net income of $102.7 billion for fiscal 2022, with further growth towards $150.4 billion by fiscal 2026.
i. Base Case Financial Projections:
Drawing on the above analysis, our price target for Apple remains in the $200-level, which would represent upside potential of more than 25% based on the last-traded share price of $161.38 at the time of writing (March 9th).
Key valuation assumptions applied to our analysis are largely consistent with those discussed in the previous coverage, considering Apple’s operating environment and growth prospects have not materially changed since. The valuation analysis considers Apple’s recent developments from an operational and financial perspective, as well as its proven ability in navigating through unprecedented supply chain constraints and emerging above its tech peers in the process. Its strong balance sheet, which continues to boast an unwavering ability in generating robust cash flows from operations despite slowing consumer sentiment, also shields its valuation from any material impacts as a result of the Federal Reserve’s upcoming rate hike cycle. As discussed in one of our previous coverages on the stock, Apple’s net cash position is expected to help fund additional growth for the company without the incurrence of incremental capital costs ahead of interest rate increases. This marks another reinforcement to investors’ confidence in Apple's stock, especially as they continue their “flight to quality” under today’s volatile macroeconomic environment.
i. Base Case Valuation Analysis:
ii. Sensitivity Analysis:
Despite recent market volatility, which has been a slight setback for Apple's stock, large gains remain on the horizon. Over the past few quarters, Apple has continued to outperform expectations in terms of both sales and earnings despite significant supply chain constraints and inflationary price pressures. This has only further bolstered Apple’s overall net cash position, a strong backing for its valuation prospects ahead of the increasingly uncertain global economic growth outlook.
Apple’s ongoing upgrade cycle also bolsters its strategy of offering diverse pricing and performance options to fit a wide range of user needs and preferences. This will not only bolster Apple’s continued market share gains, but is also expected to help offset some of the risks of dampened consumer spending in the near-term, as stubbornly high inflation continues to erode disposable income.
Paired with continued strength in growth across its services segment, and new product segment introductions expected in coming years (e.g. mixed reality headsets; autonomous vehicle), Apple’s performance from a fundamental and cash-basis perspective remains robust, which will further complement its potential on valuation gains over the longer-term. Although the stock is currently trading near all-time highs, it will only be a matter of time before it climbs further to become an enduring member of the exclusive $3 trillion club.
This article was written by
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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.