Shares of consumer hardware tech titan Apple (AAPL) are trading lower this week as FAANG weighed down the broader averages. Indeed, the uptick in rates spooked many, but it was quite a surprise to see the tech leaders begin to fade so violently.
Certainly, Apple has been resilient through this tech sell-off, thanks to its incredibly healthy balance sheet and robust cash flow stream. Indeed, Apple is a company that some critics like to slam for lacking innovation.
While the firm has gone quite a while without revealing a game-changer to the magnitude of the first iPhone, the company has stayed ahead of the curve as far as tech is concerned. With the M-series of chips and momentum starting to pick up in its services business, it’s clear that the company still desires to disrupt markets where there’s a rich economic profit to be had.
With its powerful network effects and a striking ability to one-up the competition, it’s hard to take profits on Apple, even if the stock trades on the more expensive side of the historical spectrum at around 30 times trailing earnings.
There’s a good reason behind the higher multiple. The sticky services business continues to grow at a stellar rate. With its hardware subscription service underway, there are reasons to believe that the next leg of the services push could inspire further multiple expansion, perhaps towards the range of 30-35 times earnings.
In any case, the company is firing on all cylinders, with projects that analysts and investors may have yet to factor into their valuation.
Whether we’re talking about a hardware subscription, fintech ambitions, or future hardware releases, Apple continues to be a beast that’s more than willing to disrupt the status quo.
I remain bullish on Apple stock, even as investors begin to lighten up on the top tech stock ahead of another round of rate-induced selling and slowing demand.
Apple’s Secret Sauce? One-Upping the Competition
Apple CEO Tim Cook views Apple as a player in hardware, software, and services. It’s the latter area where the company has really evolved under the Cook era. The company isn’t just looking to move into “hot” and exciting new markets to appease shareholders.
The firm only seems willing to get into a new vertical if it sees a way to leverage technologies to make things better or cheaper for prospective users.
Indeed, we saw the type of one-upping when the firm introduced its Apple Card. The credit card didn’t just integrate well with the Apple ecosystem; it encouraged consumers to engage in healthy financial habits.
Undoubtedly, credit card firms would rather their users maintain consumer debt balances to charge those hefty interest rates. This is a significant reason why credit card kingpins have been incredibly profitable for many years.
By encouraging healthier financial habits, Apple is breaking all the rules of being a fintech player. As the company adds to its arsenal of financial technology products, the days of high fees may be drawing to a close. And Apple will benefit, as too will its users who may have grown accustomed to carrying considerable consumer debt balances.
Existing Services Still Have a Long Growth Runway
It’s not just fintech where Apple could make a splash over the next decade with services. The company’s existing line of services is nowhere near maturation. Apple TV+, in particular, is showing early signs that it’s ready to compete head-on with the leaders of the video-streaming market as it steadily begins building its fanbase.
Academy-award-winning film CODA put Apple TV+ on the map. With sights set on sports and the production of high-quality content, Apple TV+’s angle of attack becomes more apparent.
Indeed, it’s hard to stack up against the libraries of a company like Disney (DIS) and its streaming service. With high-rated exclusive content and the inclusion of sports, Apple TV+ is beginning to mature into a service with profound disruptive potential.
Now, Apple TV+ has gotten off to a plodding start. As it picks up momentum (and Academy awards) over time, though, expect the service to eat into the margins of the streaming incumbents.
Simply put, Apple is kicking its services revenues into high gear by exploring new services while continuing to strengthen its existing services. After the latest Academy Awards, I think Apple TV+ has gone from a heavy underdog with a shallow library to a much-improved service that could become a top-three player in streaming within five years.
Wall Street’s Take
Turning to Wall Street, AAPL stock comes in as a Strong Buy. Out of 28 analyst ratings, there are 23 Buy recommendations and five Hold recommendations.
The average Apple price target is $193.36, implying an upside of 15.8%. Analyst price targets range from a low of $161.00 per share to a high of $215.00 per share.
The Bottom Line on Apple Stock
Apple seems to be doing everything right when it comes to services. Apple TV+ started slow, but now it’s picking up traction. Could the same be in the cards for Apple Arcade, its other underrated service?
Perhaps. In any case, new services and existing services have room to the upside, which should propel shares, even in a potential economic slowdown.
Amid the ongoing Ukraine-Russia crisis, Apple reportedly cut iPhone SE production by 20%, with AirPod orders slashed by around 10 million.
With a recent but brief 2- and 10-year yield inversion signaling a recession in a year or so, the recent production cut was underwhelming, as the stock’s rally towards new highs faltered. Though near- to medium-term demand for specific hardware could wane in the back half of the year, I still think there’s too much to look forward to in the services department.
Apple Car and Apple VR/AR headset aside, there’s a lot of innovation underneath the hood that should support the stock en route to a $3 trillion market cap.
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