Source: PaxForex Premium Analytics Portal, Fundamental Insight
Apple stock hit an all-time high last week right after several noteworthy analysts made encouraging forecasts about the tech giant's future.
Wedbush analyst said that worldwide demand for the iPhone 13 still exceeds supply by about 10 million units, that holiday sales will be strong, and that the upcoming launch of the augmented reality (AR) headset will significantly boost Apple sales and profits in 2022.
Katy Huberty of Morgan Stanley said that Apple's price does not yet include its upcoming AR, VR, and car products and that the company would benefit from a "quality run" in other stocks. Both analysts set a $200 price target for Apple stock -- about 14% above its current price.
Is Apple stock a great investment? Let's have a look at a few arguments in support of buying this tech leader's stock, as well as one reason to sell it to come up with some sort of denominator.
First, there's the iPhone's 90% loyalty rate.
Apple's overwhelming dependence on the iPhone, which accounted for 52% of its revenue in fiscal 2021, is often cited by "bears" as a major weakness. But a recent Consumer Intelligence Research Partners (CIRP) study found that 90% of iPhone buyers still plan to stay with Apple.
Two factors are holding company users back. First, Apple's expanding ecosystem of third-party services discourages users from switching to Android devices. Second, iPhones are considered a status and luxury symbol that even the most expensive Android devices cannot match.
Next, it's Apple`s 745 million paid subscribers.
Apple ended the fiscal year 2021 (which ended in September) with 745 million paid subscribers for all of its services, a nearly five-fold increase from five years ago. Annual service revenue, at 19 percent of total sales in 2021, has nearly tripled over the past six years.
Third, keep in mind the $191 billion in cash and cash equivalents.
Apple ended the year with $191 billion in cash and marketable securities. This allows it to expand its software and services ecosystem with new content, develop new AR devices and invest in its secretive electric car projects. Apple could also acquire several businesses to boost those actions and decrease its overall reliance on the iPhone.
Furthermore, the company is well protected against inflation.
Rising inflation drives up component and labor costs. So companies that can't negotiate lower prices with their suppliers or pass these higher costs on to their consumers will suffer.
Apple should not bother about any of these factors yet. It uses its brand strength and order size to put pressure on suppliers to lower costs, and it often splits orders for the same components among multiple suppliers to keep them from getting an advantage in price negotiations.
Apple is also developing more of its own chips to reduce its dependency on third-party manufacturers. That's why it replaced Intel processors with its own Arm-based processors in its Macs and MacBooks last year, and why it bought Intel's baseband modem division to lessen its reliance on Qualcomm.
As for shifting higher costs to consumers, Apple's brand loyalty probably gives it more room to raise prices than other hardware manufacturers. In short, Apple is much more resistant to inflation than other tech stocks.
And, of course, the $86 billion in buybacks should be factored in.
Apple bought back $86 billion worth of stock in the fiscal year 2021, reducing the total number of shares outstanding by nearly 4 percent.
Over the past five years, Apple has reduced its share count by 22%, while its share price has soared almost 500%. For the foreseeable future, Apple will continue its tradition of large stock buybacks to increase shareholder value.
The only reason to short Apple stock may be its forward valuation.
However, many are not as optimistic as Ives or Huberty about Apple's near-term future for a simple reason: its stock is rising in value.
\Apple is already trading at 30 times forward earnings. That's a very high price-to-earnings ratio for a company that is forecasted to increase its revenue and earnings by 4% and 2%, respectively, this year. Next year, analysts expect the company's revenues and profits to grow only 4% and 7%, respectively.
At $200 a share, Apple will trade at 35 times earnings guidance, which is a very high valuation even with the company's upcoming products in 2022.
Apple is a great long-term investment, but investors who don't already own the company's stock should have realistic expectations about its growth potential. Shares may rise as much as $200 on recent speculation about Apple's upcoming products, but that growth is unlikely to be sustained.
Investors can accumulate some Apple stock now, but they shouldn't expect significant long-term growth until the company releases its rumored AR, VR, and car products.
As long as the price is above 168.90, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 178.96
- Take Profit 1: 188.40
- Take Profit 2: 192.90
Alternative scenario:
If the level of 168.90 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 168.90
- Take Profit 1: 161.80
- Take Profit 2: 157.40
