An iPhone under the Christmas tree – for many people this wish will not come true this year. Apple has huge supply problems. Several million iPhones will not be ready in time for the festival due to production failures in China. Not the only annoyance from a stock market perspective. Since the record high at the start of the year, the share value has fallen by about a quarter. Is 2022 just a halt? Or the beginning of a long phase of problems? Analysis. By Sven Parplies
Finances: Apple remains a profit machine. In the fiscal year that ended in September, the Californians posted net income of $99.8 billion, more than ever before in the company’s history. However, the growth dynamic is slowing down. According to the Bloomberg consensus, analysts even expect a slight decline in profits for the year that began in October, and slight increases of around 5% in the following years. That’s not particularly impressive for a growth stock.
Apple’s next big thing
Apple is first and foremost the iPhone. More than half of the last $394 billion in annual revenue comes from this product alone. Thanks to price increases and a wider choice, the group was able to continue to increase sales of the smartphone. The product line was expanded with the clock and the iPad. The iPad generated over $29 billion last year. What would be a huge hit in other companies is less than 10% of Apple’s total sales. In the long term, the world of virtual reality could boost business. Apple’s first VR glasses are expected in the new year. It’s probably a side hustle at first, but it could have great potential as the metaverse moves into people’s reality. Then there are the plans for an Apple car. According to recent rumors, it could actually roll off the assembly line in 2026. Investment firm Loup calculates that with a 2% market share and a unit price of $100,000, Apple could achieve sales of $150 billion with his car by 2030. That would be a big deal for Apple too. After the many problems and delays, many question marks remain with “Project Titan”.
The unsung hero of Apple stock
Around 1.8 billion devices with Apple’s operating system are in use worldwide. This is a huge group of customers to whom the group can also sell services. A major source of money is the App Store, where Apple earns commissions. Subscription offers for music or movies and cloud storage space should also bring in regular revenue. The services business now accounts for 20% of the group’s turnover and also shows above-average profitability. As soon as the costs of a service are covered, the profit increases disproportionately with each additional customer. According to a Bloomberg estimate, the service sector’s margin is twice that of appliances.
The Chinese dilemma:
Greater China is also an important market for Apple. Nearly 20% of the group’s sales came from it recently. The region is even more important as a production site. According to Bloomberg Intelligence, more than 90% of all iPhones are produced in China. The government’s Covid restrictions are therefore doubly problematic for Apple – they are driving down product sales in the country and hampering production. Political tensions are also dangerous. An escalation of the crisis in Taiwan would weigh on the business of Western companies in China. Apple is likely to relocate its production to other countries, including Vietnam and India. But it’s a long process.
Legal headwind for Apple
Big Tech has made enemies. Market dominance and the processing of users’ personal data have alarmed competition authorities. At Apple, the focus is mainly on the App Store: the group receives up to 30% commission on all sales. App providers are unhappy and competition authorities also want changes. In the European Union and later probably also in the rest of the world, Apple should open its universe to the shops of the competition. It’s hard to predict how painful this will be for Apple. Analysts assume that the majority of users will continue to prefer Apple’s App Store purely for security reasons.
The most important question: what is the Apple stock really worth?
Apple is the most valuable company in the Western world, one could also say the most expensive. The market cap is over two trillion dollars despite recent price declines. Remarkable: The price/earnings ratio has increased significantly over the past ten years. From under 10 to over 30 at the top. More recently, the multiple based on expected corporate earnings for the next twelve months was 21. Apple shares have become more expensive, what level of P/E is justified? If you look at earnings growth of around 5%, then the stock looks overvalued. Alternatively, given its brand strength and financial strength, Apple can be compared to a consumer goods giant like Nestlé or a luxury goods conglomerate like LVMH. In this case, a P/E ratio in the upper 20s would be justified. Analysts continue to believe in the stock: according to the Bloomberg database, 80% of recommendations are buy recommendations, and only 4% are negative. The average price target is the equivalent of 174 euros. While the environment for tech stocks is tough right now, Apple remains a good long-term investment.
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Conflict of Interest Notice
The CEO and majority owner of the publisher Börsenmedien AG, Mr. Bernd Förtsch, has taken direct and indirect positions in the following financial instruments mentioned in the publication or related derivatives which could benefit from any price movements resulting from the publication : Apple