August has proven to be a challenging month for Apple (NASDAQ:AAPL) shares, experiencing a rapid correction post-earnings. In a volatile trading session on Thursday, Apple stock saw a decline of 2.62%, erasing most of the gains from Wednesday. Despite delivering strong third-quarter fiscal results, Apple faced high expectations due to its impressive performance leading up to a major unveiling.
While Wall Street analysts have expressed optimism about the iPhone giant’s prospects ahead of its significant September event, the stock has encountered difficulties in maintaining a rebound.
The spotlight is now on the U.S. Federal Reserve, with Powell’s Jackson Hole address occurring today. Technology stocks have been caught in the upheaval as the Fed raised rates to their highest levels in decades to combat heightened inflation.
Nonetheless, even if interest rates continue to rise gradually, it’s unlikely that highly profitable mega-cap tech companies like Apple will remain constrained for an extended period.
Rationale for Apple Stock’s Premium Valuation
The remarkable first-half rally in Big Tech raised concerns for some observers. While Apple’s trailing price-to-earnings (P/E) ratio of 29.6 may seem on the pricier side, it’s important to acknowledge that the premium price tag accurately reflects Apple’s worth.
The expansion of Apple’s services segment has contributed significantly to multiple expansion over the years. The recent quarter also displayed impressive growth in services. Yet, investors appear to be overlooking this aspect. While there is still potential for Apple to progress and enhance user experiences, the company needs to continue its innovative efforts to drive the stock price higher.
The time has come for the “E” in P/E to catch up with the “P.” Some analysts, including those at Wedbush, anticipate that the upcoming iPhone 15 could invigorate Apple’s performance. It’s been a while since an iPhone super-cycle occurred. Whether the masses will be enticed to upgrade with the iPhone 15 remains a pivotal question.
Regardless, Apple has an array of exciting developments planned for the coming year, including the Apple Vision Pro’s spatial computer, which some investors and analysts have underestimated recently.
The Potential of Spatial Computing and Young Consumers
The launch of spatial computing (or the metaverse) has faced challenges so far, with virtual reality and augmented reality headsets struggling to gain traction. Yet, a single breakthrough moment could swiftly shift the momentum from stagnation to rapid progress.
The timing of this pivotal moment remains uncertain. However, it’s highly probable that such a moment will transpire within the next decade. While a decade might seem like a lengthy period to wait for a tech trend to flourish, Apple offers a robust business model that continues to generate substantial cash flows during the anticipation of spatial computing’s breakthrough.
Younger consumers are poised to drive Apple’s ecosystem forward over time. In the U.S. market, a staggering 87% of teens own iPhones—a figure that has more than doubled since 2012. These loyal young customers are unlikely to switch to Android products, and breaking away from the Apple ecosystem proves challenging once one is immersed.
Apple’s adeptness in capturing the younger demographic positions the company well for continued success as these consumers mature and increase their purchasing power. Their potential Lifetime Value (LTV) is considerable. This demographic could potentially be early adopters of Apple’s spatial computer, the Apple Vision Pro.
Presently, iPhone users are inclined to explore other products within the Apple ecosystem, such as AirPods, iPad, Mac, and Apple Watch. They also engage with various services like iCloud, Apple Music, and Apple News, while likely purchasing multiple iPhones over the years.
Apple users aren’t trapped in the ecosystem; they simply find it appealing. For them, Apple’s side of the fence is notably greener.
Looking Ahead
Apple stock correction is primarily attributed to concerns about valuation. Investors are particularly interested in robust iPhone growth. With the advent of the iPhone 15, growth is expected to regain momentum, even amid macroeconomic challenges.
While many investors are focusing on the most recent quarter, it’s crucial not to lose sight of Apple’s compelling long-term narrative. Morgan Stanley recently emphasized that the stock is “under-owned” among the large-cap tech stocks it tracks. From my perspective, Apple is a company that merits being “over-owned.” The company’s promising future, bolstered by steadfast young consumers and upcoming innovations, bodes well for potential investors.
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