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Apple (AAPL) is among the most popular stocks in the world. Armed with a portfolio of multi-billion-dollar products and solutions, the tech giant has successfully disrupted various market segments ranging from smartphones to wearables.
Valued at a market cap of $2.82 trillion, Apple is the largest publicly traded company in the world. In fact, its market cap is even larger than the cumulative market caps of all companies part of the FTSE 100, which is the U.K.’s flagship stock market index.
AAPL stock has returned 270% in the last five years, 1,200% in the last 10 years, and a staggering 58,000% in the last two decades, easily crushing broader market returns by a wide margin. If we adjust for dividends, total returns since June 2003 are even higher at 68,900%.
But we know that past returns don’t matter much for current and future investors. So, let’s see if Apple has enough fuel to keep generating market-thumping returns in the upcoming decade.
The Bull Case for Apple Stock
Over the years, Apple has diversified its revenue streams by introducing several products and services. But the iPhone still accounts for more than 50% of the total sales of the company. In fiscal Q2 of 2023 (ended in March), the iPhone segment reported sales of $20.9 billion. Despite the saturation of the smartphone market, Apple’s upgrade cycles continue to drive demand enabling it to keep increasing its top line.
Apple Services is the second-largest business segment and accounts for almost a fifth of total revenue. This segment includes several subscription-based solutions such as the App Store, Apple Music, Apple TV+, and Apple Care.
Apple Services is a high-margin business for the company that enjoys a gross margin of 71%, compared to hardware products, which have a margin of just 37%.
Apple has created a massive ecosystem that results in repeat sales and higher customer engagement rates. There are over two billion active Apple devices globally which the company continues to monetize.
In recent years, Apple entered the wearables market with the introduction of products such as the AirPods and the Apple Watch. According to data from Business of Apps, it sold 82 million AirPods and 53 million Apple Watches in fiscal 2022, resulting in sales of almost $44 billion. With more than 85 million subscribers. Apple Music is also the second largest music streaming platform globally.
As Apple is one of the most brand-conscious companies in the world, it enjoys pricing power. For instance, the iPhone was first launched in 2007, and its prices have consistently moved higher in the last 16 years. During Samsung’s smartphone fiasco in 2018, the iPhone accounted for more than 100% of global smartphone profits, which suggests that all other manufacturers were selling devices at a loss.
Buoyed by the Services business, Apple has increased gross margins to 43.3% in fiscal 2022, up from 38.5% in fiscal 2017. Its operating margins have risen from 27% to over 30% in this period.
What Next for AAPL Stock Price and Investors?
Apple made its first major product announcement yesterday in almost a decade as it unveiled the Apple Vision Pro, a virtual reality headset. With a starting price of $3,499, the Vision Pro may revolutionize virtual interactions and might be integrated with Apple Arcade and the company’s streaming platform.
A CNBC report states VR headset sales in the United States was $1.1 billion last year. Moreover, the total addressable market for these devices might grow to $100 billion by 2030 and $500 billion by 2037, providing Apple with enough room to grow its revenue further. If the Vision Pro accounts for 20% of the market, it will rake in $20 billion of additional sales by the end of this decade.
Analysts tracking Apple stock expect sales to decline by 2.5% to $384.6 billion in fiscal 2023. Comparatively, adjusted earnings are forecast to narrow by 2.3% to $5.99 per share. But sales are then estimated to increase by 6.5% to $409.65 billion in fiscal 2024, with adjusted earnings growth forecast at 11%.
Investment bank, Evercore ISI, raised the target price for AAPL stock to $210 from $190 soon after the WWDC event yesterday. It expects the VR headset to account for $10 billion in sales within the next five years and add $0.20 per share to earnings.
Other investment banks such as Morgan Stanley (MS) and Jeffries (JEF) also remain bullish on Apple stock. Morgan Stanley raised its price target for Apple stock to $190 from $185, while Jeffries has a target of $210, up from $195.
The Final Takeaway
Apple is a company that is armed with a wide economic moat and expanding profit margins. It is an outlier in the consumer hardware space as the company continues to benefit from economies of scale and cost optimization efforts.
In fiscal 2022, Apple’s free cash flow stood at $111 billion, which will be used to enhance shareholder wealth, reinvest in product development, improve its balance sheet, and launch new products.
Though currently priced at 30 times forward earnings, Apple is well positioned to deliver double-digit earnings growth to shareholders once the macro economy improves. With AAPL's present valuation, a modest increase of 7.5% would surpass the $3 trillion market cap milestone it previously attained in January 2022.
In addition, Apple accounts for 47% of Warren Buffett’s Berkshire Hathaway (BRK.A) portfolio. Last month, when discussing Apple, Buffett said, "It just happens to be a better business than any we own." In my opinion, it makes sense to follow the Oracle of Omaha and add this tech behemoth to your long-term equity portfolio.
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