Apple (Nasdaq: AAPL) Stock Has Been Resilient

Apple’s stock remains resilient with the global economy continuing to remain relatively robust. Global consumer sentiment continues to remain at a run-rate that has been relatively positive despite the increasing levels of inflation. Apple’s main products, the iPhone and the PC segment, continue to see demand despite an overall, slowdown.

By:  1 st September 2023

Apple’s third quarter overview

Apple’s revenue continued to decline year-over-year (YoY) as iPhone sales took a hit. Post pandemic Apple saw demand increase as the low-base from previous years led to higher demand, albeit, China was still in lockdown during the period. Now that the global economy continues to slowdown as interest rates take hold, iPhone sales are witnessing a slowdown as well. Clearly, consicpicous consumption is being affected, and the coming quarters might be even weaker, as Apple navigates the global economic slowdown.

Overall, global economic spending continued to decline during the quarter, with Apple’s main market, the United States, witnessing a significantly higher decline in consumption

Meanwhile, services continued to remain strong with over 1 billion subscriptions during the quarter. Services revenue grew by 8%, and are clearly not as affected by the slowdown in spending

Can iPhone sales continue their strong run of form?

iPhone sales continue to remain strong through the first half of 2023, with the iPhone 14 Pro Max remaining the top selling flagship phone over $500. iPhone continued with strong market share for high end phones with 75% market share in 2023.

Since, COVID has subsidised strong sales continue to come from the likes of China as well with Total sales in 2023 could be slightly lower, although with the release of the iPhone 15, and the Chinese economy continuing to remain strong in terms of consumer demand, it is likely total iPhone sales come in pretty similar or slightly higher than in 2023.

Sales during the first half were down close to 4%, for Apple. Apple sold 225 million phones in 2022, and in 2023 it is expected to sell around 220-227 million phones, according to early estimates, and projections based on historical numbers after it released the iPhone 15.

Analysts are currently estimating that around 230-235 million iPhones 15’s will be sold in total. Apple does plan to once again increase the price of the iPhone 15, which should help shore up sales.

Total revenue in 2022 came in $394 billion, with 52%of that coming from iPhone sales. In 2023, projections by management in terms of iPhone sales is currently at 3-4% lower than 2022, but with iPhone 15 coming out, the total number of sales could actually rise slightly by single-digits.

Apple’s iPhone market share remains a strong contender in the U.S. market, with market share increasing to 57% from a previous level of 52%. The increasing market share bodes well as penetration for smartphones remains quite high in the U.S.

The other big market for the iPhone is China, whereas in China, the market share is a lot lower, coming in at 20-21%; iPhone has a future that is larger in China than that of the U.S., owing to lower penetration (around 86%). But in the first quarter of 2023, iPhone sales surged to 24% of total sales of smartphones, and phone sales grew by 60%. China will play a key role in the coming quarters, due to the base effect of COVID shutdowns. China’s consumer sentiment has remained strong through the first-half.

Another key market for Apple is the Asia-Pacific region, where iPhone has strong penetration as well, countries such as India, where penetration is lower, and the future is stronger. iPhone continues to move both manufacturing, and open iPhone sales outlets in the country. Considering growth is likely to be around 5%, in the medium term, expect iPhone sales to grow slightly faster in the country at around 6%, with pricing that is similar to other countries. Asia-Pacific should also see strong sales of around 5-6% growth in South-East Asia developing countries where penetration remains similar, and GDP growth is also growing at a similar level; these are regions and countries such as Vietnam and Indonesia, all of whom have a significant population.

Similarly, iPhone has significant opporunity in overall Asia-Pacific region, where is currently has around 17-18% market share. This means it has an opportunity to increase market share, especially as purchasing power increases. Regional sales are hampered by purchasing power, but Asia is expected to grow at a rate of around 4.5-5% until the end of the decade, making it a key market for iPhone, where marginal users will continue to be picked up. The current trajectory puts iPhone potentially getting 22%-23% of the total market share in the future.

Asia will continue to see improved penetration, and current penetration for Asia-Pacific stands at around 76 percent. Considering that penetration is well below developed economies, and GDP per capita stands at around at 12-13,000 USD and 24,000 in PPP terms, there is plenty of room for the iPhone to grow.

What are the Projections for the Long-Term?

Assuming a global smartphone penetration of around 90% and around 22-23% market share, that would put the long-term iPhone yearly sales at around 1 billion iPhone sales a year over a period of 20-30 years, an increase of 5x from the current levels.

One of the main risks currently is the U.S. market, where consumer sentiment is clearly worsening, the lower sales from iPhones in the U.S. is likely to lead slower growth, or potential decline in sales. But this should be mitigated by developing markets where growth still remains strong.

The high levels of inflation have put a lot of developed markets close to recession, with consumer sentiment perenially low. This would mean conspicuous consumption is likely to be affected, which means iPhone sales, could be lower. Again this would mean that iPhone sales would be facing an uphill battle as they look to regain footing within the market.

Taking a closer look at Services

Services have been growing at a relatively faster pace, and are less affected by the overall economy. Considering the number of iPhone users in total, which is around 1 billion, services could significantly increase as penetration increases, to around 2-2.5 billion over a period of 15-20 years. This leaves plenty of room for services to grow from current levels.

Mac Sales as PC shipments fall

PC shipments in 2023 are expected to decline by 13% in 2023, with the run-rate during the first and the second quarter coming in at -13%. Apple’s PC shipment showerd resilience as well, with shipments increasing 10.3% during the second quarter of 2023. Apple shipped a total of 5.3 million units. Mac sales are expected to remain robust largely as demand continues from China and other developing countries. The resilience stems primarily from demographics, and the purchasing power of those who buy Mac, along with the brand resilience, which translates into consumers buying the brand through economic cycles.

Projection out 2023-2024 valuation and revenue.

Considering the average iPhone sale of price increases, and assuming that iPhone’s percentage of revenue remains similar, I expected revenue in 2022 to come in around 425-430 billion. That means that growth is likely 8% region in 2023 and 7-8% region in 2024. Expect sales to slightly slowdown in 2024, as the after-effects of higher interest rates in the global monetary environment continue to play a key role in where growth goes.

I expect operating profits to remain around 26%, and net profit margins to be around 24%. This translates into 103 billion in 2023 sales, and considering that growth is likely. This would mean forward P/E is likely to fall to around 29x, and dividend is likely to stay around 0.5%. Apple usually doesn’t give out dividends and prefers stock buy backs. Meanwhile, the 2024 valuation is likely to fall to around 27x, which some mights consider slightly on the higher side, if you take a look at where interest rate are.

AAPL’s competitive advantage

Apple iPhone, and Apple’s brand, and association primarily allow it to assert pricing power. Considering the price of its flagship phones which are easily $1000 plus now, it would be prudent to consider whether or not it can maintain that pricing power. Apple until now has not only been able to maintain that pricing power, but has been able to continue selling more units every year.

This stems from two factors firstly, the technological aspects, including its camera in its iPhone, and chip technology, which remains ahead of the competition. Secondly, it’s brand identity, where it has been able to position itself as a premium lifestyle brand. This has allowed it to become ‘sticky’ in terms of sales. Apple’s iPhone should remain ahead of the game for the foreseaable future as it looks to continue its strong run of form.

Should You Invest in AAPL?

Apple remains a long-term buy and could return around 9%-10% a year until 2030, and has strong long-term prospects, primarily stem from its ability to maintain a competitive advantage through brand and technology. The company clearly maintains pricing power, which may be affected during economic cycles, i.e. inflationary periods, or economic downturns. But coming out of the cyclical side, Apple iPhone should be able to maintain its pricing power, and sales are likely to continue to head back up.


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