Today we’re going to talk about a well-known company that we’ve talked about before. Nevertheless, we felt it necessary to update our forecast and see what’s interesting about it right now.
Let’s talk about the tech giant Apple. At the beginning of December, this paper set new highs. Just before that, analysts at Morgan Stanley had predicted its success.
The improvement of the forecast is significant. If earlier the experts expected the growth to the mark of $164, now they forecast the movement to $200. Analysts revised the forecast, citing an increase in iPhone shipments during the holiday season, as well as the emergence of other drivers such as augmented/virtual reality (AR/VR) glasses and autonomous vehicles. What’s more, Morgan Stanley isn’t the only firm to paint a bright picture of Apple’s prospects.
Quality comes first
Let’s look at the reasons that sparked our interest in the shares of this techno-giant. First, let’s talk about the financial situation of the company. In the last quarter, Apple’s revenue rose 29% to $83.4 billion. At the same time, earnings per share rose to $1.24 from $0.73. The improvement of indicators occurred in all geographical areas of the company’s activity.
Record sales, customer loyalty, and a smart ecosystem were the reasons that took the company’s stock to the next level.
The significant increase in numbers looks impressive, given the limited supply in the world due to the coronavirus pandemic and the unreliable supply chain. As the company’s management notes, revenue would have been higher if it weren’t for the silicon shortage and production disruptions.
Investors also paid attention to how the company uses its $66 billion net cash position and its annual free cash flow of $93 billion.
In Q4 2021, the issuer returned approximately $24 billion to its shareholders. Of that, $3.6 billion was paid out as dividends, and $20 billion was used to buy shares in the open market.
Businesses in the service sector can move to a higher stage
According to experts, shortly, we may observe the growth of Apple’s service business. And it will grow faster than the company’s customer base. In 2021, services revenue was $68.4 billion (19% of total revenue), an increase of 27% over last year. Experts at Nispel believe that by 2024, the company’s net income will grow significantly due to this business, which will generate revenue of $100 billion.
In 2020, the company’s service business covered no more than 10% of the cost of sales, and its total revenue was one-fifth. Therefore, with the growth of this segment, the company’s total revenue will increase significantly. Apple has been smart about introducing new services. For example, new membership levels have been added to Apple Music, and new award-winning content has been added to Apple TV+.
For the company, the service business is second among all sources of income. In the first place is the iPhone. The number of active Apple devices with apps installed reaches $1.8 billion, which means that the service business has an excellent head start for future growth.
Apple is not afraid of inflation
Inflation is pure evil for most companies because they have to increase the cost of workers’ compensation and device components. It negatively affects the price of the devices and may lead to a decrease in the number of consumers. Unless, of course, the company manages to negotiate a reduction in the cost of components.
For Apple, this problem is irrelevant because its powerful brand allows it to dictate prices to suppliers. It also prefers to contract with different suppliers so that they cannot exert pressure when it comes to prices.
The company also seeks to minimize reliance on third-party manufacturers for its chips, and many of the components are manufactured in-house. For example, Apple recently abandoned Intel processors in its Macs and MacBooks, replacing them with its Arm processors. Another acquisition by Apple was the division that manufactures Intel’s baseband modems, thus reducing its dependence on Qualcomm.
Moreover, Apple is less likely than other companies to worry about declining consumer loyalty if its products are priced higher, as it is the undisputed leader in popularity and loyalty. We can conclude that Apple’s resistance to inflation is much higher than that of other technology companies.
Why the iPhone could be the center of our digital future
For the last two years, we can observe an active growth of different NFT and cryptocurrency projects. The price of some NFT-projects has exceeded $1 million, and they are adding new features. They are greatly empowering users, and this trend will continue.
The expansion of digital services will be either a boon or an evil for Apple products. At the moment, the company’s protocol restricts the ability to use certain cryptocurrencies, and the list is far from complete. These restrictions make access to cryptocurrencies extremely inconvenient, forcing users, for example, to open several electronic wallets, as in the case of Ethereum.
It is unlikely that users who have downloaded NFT will like to use a strictly specific Apple Wallet, which is different from the one through which the purchase was made.
To solve the problem, Apple would be wise to either allow the use of more wallets or to engage in the development of its wallet with a high degree of security. It would help make cryptocurrency and NFT more accessible and ensure interoperability.
What causes the growth of Apple stock, and what problems may await it?
The rise in Apple stock over the past few weeks is due to the following factors:
- First of all, the Court of Appeals issued a stay of the Apple and Epic Games case. Let us remind you that we are talking about the use of links to third-party payment systems. Apple believes that informing users about alternative payment methods can compromise the security of user data in the AppStore. The process of the case will likely last for years.
- Moreover, the company’s sales increase in the run-up to Christmas, as they do every year. The Christmas sale season is traditionally very successful for the company. Back in October and November, Apple introduced new models of gadgets, which contributed to good sales in the pre-holiday period.
- According to experts, the news about Apple’s plans to release its car in 2025 contributed to the growth of shares. Investors’ purchases at the beginning of the week to level out the drawdown during the correction also worked well.
In 2021, the issuer managed to buy back 4 percent of the shares with a total value of $86 billion, reducing their free float. The company’s total stock has been reduced by 22% over the past five years, while the value of its securities has increased by almost 500%. In the future, the company plans to continue this buyback policy to improve its rating.
Analysts believe the company’s stock is expensive right now, and the main problems that could negatively affect Apple are a new strain of coronavirus and related possible supply disruptions.
The company’s stock recently reached a target price of $181.30. The shares are up more than 25%, but analysts agree that there are factors limiting this growth. At the moment, the stock is overvalued. The shortage of electronic components further exacerbates the situation. During the October conference call, company managers also confirmed these concerns. They stated that supply chain problems due to the new Omicron strain could hurt revenue, and the active spread of the new strain would only worsen the situation.
What should an investor do? On the eve of the New Year’s rally, the paper will rise. Most likely, buyers are now targeting the $200 level. When it reaches this level, the paper may start a correction. So now it’s better to open short-term deals and wait for deeper drawdowns for medium-term positions.