Source: PaxForex Premium Analytics Portal, Fundamental Insight
Over the past few weeks, the market has seen a significant sell-off in many growth stocks. These sell-offs have been boosted by numerous factors, including slowing growth in company stocks, lingering concerns about inflation and tax collection. As a result, valuation multiples have shrunk, making it harder for investors to determine which stocks are worth considering in 2022. Apple stock is up almost 40% year-to-date, well above the S&P 500's 28% return. But as demand for the iPhone 13 drops and the company's market capitalization rises, investors have a tough decision to make: hold Apple stock or sell it in the new year.
As of this writing, Apple is the largest company in the world by market capitalization, with its value approaching $3 trillion. For the fiscal quarter ended Sept. 25, Apple reported 29% year-over-year revenue growth. The company achieved 33% growth in the product side of the business, thanks to strong iPhone sales, and even reported a 26% increase in services, while sales of wearable devices rose 13% year over year. What may be even more remarkable than the revenue growth is the amount of cash Apple is generating: the company's 12-month free cash flow was $93 billion.
Apple is showing strong growth across the spectrum of revenue from services, wearable devices, and other hardware products. While Apple's long-term prospects appear good, investors have lately discovered that the Federal Reserve will start cutting asset purchases to fight inflation, and 2022 will likely see numerous rate hikes.
This dynamic puts investors in a quandary, as Apple has shown healthy growth in both the product and service markets. However, given the stock's performance over the past year, coupled with lingering inflation concerns, it seems tempting for investors to reduce their existing positions and lock in profits. Given that the company has revised its iPhone 13 forecast downward, as well as the supply chain disruptions it's faced, it's hard to assess whether Apple has any upward momentum that could push the stock higher.
Apple originally projected to produce 90 million iPhone 13 models in the last three months of the year, just in time for the holiday shopping season. Due to supply chain disruptions caused by COVID, key manufacturing partners such as Broadcom and Texas Instruments had trouble delivering enough components. These supply problems forced Apple, one of the world's largest chip buyers, to cut its production forecast for the new iPhone by 10 million units.
The supply problems were in addition to another issue for the tech giant - consumer demand. A recent Bloomberg report showed that Apple told its component suppliers that demand for the iPhone 13 was weaker than originally expected because of long waits. Product shortages and persistent delivery delays caused by problems in the supply chain have caused some consumers to opt-out of luxury purchases of the new iPhone.
With such a set of problems, it's easy for investors to lose sight of the big picture. It's important to remember that the mess compelled by inflation and the supply chain won't last forever. Rather, these are challenges that investors must learn to overcome in times of economic uncertainty.
However, there are serious opportunities on Apple's side. Despite weaker-than-expected demand for the iPhone 13, the company is not fixated on one single product. Apple is investing in the development of new products, and investors should expect them to materialize in 2022. Specifically, the company intends to release the iPhone SE 3 in the first half of 2022. This could serve as a lucrative catalyst for Apple since this device is more budget-friendly compared to higher-end devices. In addition, a series of new patents filed by Apple has led some analysts to speculate that the company's next best-selling device is less than a year away.
In late November, Morgan Stanley published an investor report highlighting that Apple was going to launch a new hardware product, specifically an augmented reality/virtual reality (AR/VR) headset. Apple analyst Ming-Chi Kuo estimates that the headset could be introduced in the fourth quarter of 2022. Apple's entry into the metaverse looks even more likely, as a new Bloomberg report suggests that the company has hired Meta Platforms head of augmented reality communications.
According to IDC, Meta is the world's number one supplier of VR headsets, controlling 75% of the market. However, Apple's entry into the metaverse could open up another multi-billion dollar option for the company as it seeks to take market share away from Meta and other leading companies. IDC predicts that the AR/VR headset market will grow from 9 million units in 2021 to 50 million by 2025.
At first, glance, reducing the existing position and making some profit may seem like a reasonable, if not tempting, option. While the Fed has delivered some clearness on how it plans to deal with inflation, the specific timing of rate cuts and increases is still uncertain. For this reason, investors cannot know for sure when supply chain problems will subside, allowing Apple and its suppliers to operate under more normal conditions.
Despite this uncertainty, Apple has a few catalysts that should give investors confidence. The new iPhones and the launch of the AR/VR headset, the latter of which will allow Apple to enter a new addressable market served by both its product and services businesses, make it hard to argue that growth is not on the horizon. The biggest questions have to do with when that growth might happen and on what scale. While investors can't go wrong fixing earnings, Apple's strong balance sheet and product expertise make it a compelling stock to buy (and hold) in 2022.
As long as the price is above the 170.30 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 177.70
- Take Profit 1: 189.60
- Take Profit 2: 195.00
Alternative scenario:
If the level of 170.30 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 170.30
- Take Profit 1: 161.70
- Take Profit 2: 156.50
