Let's talk about the largest stock in the S&P 500 – Apple (AAPL) – up 15% YTD, and most of that happening in the past month. Basically, Apple has had a slow start to the year, but has been on a tear lately.
So, as always... what's driving this? what is the fair value price for the company? ...and of course, should we buy, hold, or run?
What is Apple's moat?
My view of Apple's moat is its customer loyalty. As a matter of fact, in a survey by sellcell, 92% of iPhone users said they'd buy another iPhone when it's time for an upgrade (up 1% from 2019). That is a crazy number! Just for perspective, 26% Samsung users said they'd swap out of the brand for their next upgrade – that's 12% more people than 2019.
Part of Apple's loyalty, in my opinion, is by design. The integration between your iPhone, Apple Watch, Apple TV, AirPods, Apple Pay, iMessage, iCloud, etc. creates a high switching cost. I can speak for myself on this one... I'm comfortable with my iPhone. I don't want, or need, to switch. The amazing part is that Gen Z and Gen Alpha seem to carry this brand loyalty as well.
Taking a look at the breakdown of sales, we notice 54% of Q2 '21 sales were from iPhones – which has been consistently been in the 40-60% range every quarter. But, that's a pretty wide range; which shows the cyclicality of iPhone sales. This could be driven by how significant the technology has been updated in new releases.
Most of their growth, however, has been in Services (their second largest segment after iPhones) and Wearables, Home and Accessories. There growth and innovation in Wearables has been mostly AirPods and Watches. And that's where Apple's growth lies: innovation & services.
Aside from actual product releases, like Apple Pay Later (just announced), there's a lot of AAPL stock rumors around their next big product innovation. They're usually a bit more than rumors, because there is actual R&D happening at Apple to support it.
I'll let you have a read at these at your own leisure:
But aside from all the big rumors, there's little add-ons to its existing suite of services that can collectively boost revenues from the massive ecosystem. For example, allowing users to buy/sell stocks from its Stocks app could easily take market share from apps like Robinhood and WeBull. Apple doesn't have to be the first-t0-market. It doesn't care to be... but it cares to be the best.
The breakdown of Apple services (which isn't public) and growth has been estimated here by Trefis – whose 2025 total aligns with my own forecast – and, from it, you can see the bulk is derived by the AppStore. Licensing, is mostly derived from Google paying a fee to Apple to be its default search engine on Safari. Can you imagine the incremental revenues should Apple be it's own search engine, or simply license to others like Amazon? They can easily create a platform for more content creation like Apple Music or Podcasts. There is so much potential with just minor tweaks. The moat here, again, is the ease of integration with all these services!
Fair Value Calculation
The issue, however, I have with the price of Apple stock is that it is trading at high premiums relative to it's own history. But, that's the case for most stocks right now. Factoring in a compression of valuations, I get a price target of $140 - a 6% downside from where we are today.
The main risks to the stock today are below. However, these are far outweighed by the potential upsides imo.
- Apple's inability to continue to innovate (but a huge upside if they do)
- Antitrust legislation preventing Apple's integrated ecosystem to grow
- High market valuations
The stock is HOLD for me. I really like the company, but I am just cautious of entering now with its recent run ahead of earnings. The valuation is stretched relative to history, though you can (like I did) make the case for it being undervalued. I think owning Apple is a no-brainer, and you can't go wrong with it.
But, I will never say something is too big to fail. Apple just need to continue to innovate and provide integrated services to its loyal user base and the company will continue to be a part of culture. But, of course, hold at your own risk 😉
I do think it's prudent to trim positions and take profits here – which, in full disclosure, is something I have done.
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