All eyes will be on Apple’s (NASDAQ:AAPL) forthcoming iPhone 14 announcement event, called “Far Out,” which is scheduled for Wednesday (September 7th). Far Out will be the company’s first big product launch presentation this year, following up from clues dropped earlier this year at “Peek Performance” and “WWDC 2022.” It will also serve as a preview of another slate of new goods set to be unveiled in October, including the highly anticipated line-up of new iPads and Macs with upgraded Apple hardware, rounding out what is believed to be one of the company’s busiest launch years on record.
Far Out will provide an opportunity for Apple to demonstrate its market leadership and associated fundamental strength, which will be critical in weathering the near-term consumer downturn and providing sustainable long-term growth that will support its value prospects. Nonetheless, the stock has continued to fall in recent weeks, coinciding with a broad-based market selloff in response to the Fed’s warning of additional policy tightening to manage inflation. This has heightened market worries of a structural economic collapse ahead.
However, Apple’s track record of outperformance and resilience, as seen in recent quarters, is projected to continue. The following study will delve into Apple’s persistent brand power; rising iPhone installed base, and robust financial sheet – the key to the stock’s long-term potential.
1. Brand Power
Apple has created a strong brand over the years by launching a crucial slate of gadgets spanning music players, smartphones, smartwatches, and audio devices that have repeatedly challenged and surpassed their predecessors. Not only is the brand’s success based on its reputation for quality, but Apple has also gone out of its way to ensure seamless integration throughout its broader ecosystem of offerings, which is critical to offsetting the years-long lifespan of many of its devices (e.g., average iPhone upgrade cycle is approximately three to four years; average Mac upgrade cycle is about five years). And this has continued to lay the groundwork for its brand loyalty in worldwide homes, ensuring a certain amount of success whenever new items or services are offered (remember last year’s craze over the $19 Polishing Cloth?)
2. Apple’s $3T Market Cap is Anchored by the iPhone
Even though we have often attributed Apple’s previous success in new product introductions to its integrated “ecosystem” of product and service offerings, this ecosystem ultimately links back to the iPhone. The iPhone is the foundation for Apple’s other gadgets and service categories. And the ongoing rise of Apple’s iPhone installed base highlights the enormous long-term neighboring income opportunity:
On paper, the iPhone accounts for around half of Apple’s sales, but the actual figure is far higher. That 50% figure indicates the revenue generated by selling real iPhone devices, ignoring the device’s influence on other items. Additionally, a new phone may encourage customers to purchase extra accessories.
This year, Apple has continued to gain market share in the smartphone market, bucking industry-wide decreases caused by a dwindling consumer end-market. Smartphone shipments have fallen this year due to global supply chain bottlenecks and shrinking consumer disposable income amid record-high inflation. Nonetheless, Apple’s iPhone sales have increased in both unit and monetary terms. As discussed in our most recent stock analysis, Apple’s iPhone take rates have been somewhat resilient to near-term economic threats compared to the lower-end smartphone market. Its solid take-rate bolsters the iPhone’s continued market share increases in the United States, where more than half of Americans now own an iPhone, surpassing long-time competitor operating system Android.
3. Bring It Home With a Robust Balance Sheet
Finally, while the unpredictable macroeconomic environment has resulted in a major shift in investors’ preference for profitability over “growth at any costs,” Apple satisfies both boxes.
Over the years, the company has demonstrated a consistent track record of producing generous returns on investments, bolstering a balance sheet of $60 billion in net cash as of its most recent fiscal quarter to support the continued innovation required to sustain its long-term growth trajectory. Moreover, given the recent market slump, Apple’s strong net cash position allows the corporation to engage in growth projects “without incurring significant capital expenses” ahead of quick interest rate rises. As we previously discussed in our coverage of how tightening monetary policies will impact Apple’s long-term valuation outlook, the company’s robust checkbook is expected to cement investors’ confidence in the stock as they continue their “flight to quality” in the face of continued market pressure from tightening economic conditions ahead.
While Apple is vulnerable to near-term macroeconomic challenges, its long-term growth story remains intact. Moreover, the firm has repeatedly proved its resilience in facing market and supply chain problems through prolonged fundamental outperformance.
Apple’s success is reinforced by its strategic execution of day-to-day operations down to the retail level, developing stronger brand loyalty, a technical moat underpinned by ongoing iPhone growth, and one of the industry’s best bank sheets. For example, Apple’s use of gift card rebates during last year’s holiday sales was a tactical move at the operational level to mitigate the negative impact of prolonged inventory shortages – rather than offering one-time discounts to customers who might have gone to competitors, gift card rebates secure future sales to Apple. Implementation of similar operational strategies during the first half of the calendar year is likely to have played a critical role in Apple’s outperformance during the June quarter, where lost sales due to ongoing supply shortages and macro headwinds fell short of the previously projected range of $4 billion to $8 billion.
With supply restrictions and economic slowdown continuing a near-term trend, we anticipate the business to continue executing comparable operational tactics to mitigate the effect of these headwinds while retaining the three essential drivers of its value – brand strength, sustained iPhone demand, and a strong balance sheet – to unleash the further potential for the stock.
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