Apple's share price is near all-time highs, and the market value has never been reached by other companies, and now Apple must justify those gains.
Apple's share price has had a historic year. It has risen by more than 50% in 2023 and recently hit a new all-time high. This is the best performance of any company ever in terms of wealth creation, with Apple's market capitalization growing by $1 trillion.
But this unprecedented rally came during one of the company's most disappointing periods. In each of the past four quarters, Apple's sales have declined from the previous year. This downward trend is likely to continue in the December quarter of this year. Apple's most important hardware products, the iPhone, Mac and iPad, still generate huge sales, but the momentum is gone.
Meanwhile, Apple hasn't had a hot new product since it launched its groundbreaking wireless earbuds, AirPods, in 2016. Against this backdrop, Apple's upcoming mixed reality headset, Apple Vision Pro, is particularly important.
But success is far from assured: the promise of virtual reality and augmented reality has attracted many entrants, including Meta Platforms and Microsoft, but there have been few success stories.
This is Apple's paradox: the company's stock price is close to its all-time high, its market capitalization is unprecedented, but the growth has disappeared. Sales fell 3% in the most recent fiscal year, and growth is expected to be less than 4% in the current fiscal year, which ends in September next year, and there are no clear plans for a restart.
It's possible that Apple will stick to its current plans and still find a way to return to growth. This requires some optimistic assumptions about the frequency of iPhone upgrades, the continued sale of devices, and the continued low double-digit growth of the portfolio of services, including the App Store, Apple Music, and iCloud.
However, Apple's tradition is to innovate, not to increment features. Apple fans and shareholders have been trained to expect great, distinctive products, or as Steve Jobs once said"Leave a mark in the universe"products.
It's hard to leave a mark in the universe, especially if you're maintaining the edge of your existing lineup. Wall Street analysts expect Apple's sales to reach $397 billion and net profit to reach $100 billion in the September 2024 fiscal year.
It all starts with the iPhone. It's been 16 years since the iPhone was launched, generating $200 billion in revenue in September 2023, nearly the size of Microsoft's entire revenue. For its part, the iPhone business will be among the top 15 companies in the United States.
But in September FY2023, iPhone sales were down 2%, and there haven't been many recent hardware updates. The smartphone market is now mature. IDG believes that global smartphone sales will grow by just 1. per year until 20274%。The iPhone also faces increasing competition from Huawei and other local up-and-comers in China, Apple's most important non-US market.
The fastest-growing segment of Apple's business is the services portfolio, with revenue of $85 billion in fiscal 2023, up 9% year-over-year. If it were an independent company, Apple's services division would be among the top 50 of the Fortune 500.
Apple's services business includes advertising, financial services, podcasts, games, Apple Pay, Apple Care, and search revenue from Google. As the company's business increased, the company improved** and increased revenue.
But at the end of the day, the best way to increase your services is to sell more iPhones, iPads, and Macs, as most of these services are consumed on Apple devices.
In addition, there are:"Wearables, home and accessories"This umbrella segment includes AirPods, Apple Watch, and HomePods. Revenue fell 3% in the most recent year to $40 billion, which is comparable to Best Buy's annual sales. The current suspension of watch sales due to patent disputes will not help the department's performance.
Like the service business, Apple's hardware products rely heavily on the huge installed base of iPhones and other devices, and there are not many Android phone users paired with the Apple Watch. In 2024, Apple will launch the Vision Pro headset, adding another member to its wearables lineup, but near-term expectations are not high.
Apple's roots are in computing. Mac will celebrate its 40th anniversary in January (remember the 1984 Super Bowl ad?).It wasn't the happiest anniversary, with Mac having a dismal 2023 fiscal year, with revenue down 27% to $29 billion.
Now in its 14th year, iPad is almost the same size as Mac, with sales of $28 billion in fiscal 2023, down 3% year-over-year.
It's worth noting that Wall Street seems to be generally unimpressed by Apple's lackluster growth. At least for now. Of the 47 Apple sell-side analysts tracked by Factset, only three rated Apple** as sell or equivalent.
At the most recent price of $195, Apple has a forward price-to-earnings ratio of 30, up from 20 at the beginning of the year, and the stock is trading at a 50% premium to the S&P 500 and just 20% at the start of the year. Apple's P/E ratio is higher than that of Microsoft, Alphabet and Meta, all of which are growing faster.
Nvidia is also cheaper, even if it has tripled this year. Nvidia's earnings are expected to grow by 70% this year, compared to Apple's 7%.
Apple's earnings per share increased slightly, thanks to aggressive buybacks. The company still has about $51 billion in net cash and has committed to eventually reducing its cash reserves to zero, which means that the pace of large buybacks should slow down.
Therefore, Apple needs the next new product even more.
The recovery in consumer spending and the acceleration of the iPhone update cycle are the most direct ways for Apple to boost growth. According to Statista, Apple consumers in the U.S. currently hold iPhones for just under three years.
Hoping for iPhone updates is the least satisfying way to grow, but perhaps the most likely. Wedbush analyst Dan Ives recently reiterated his opinion on Apple"Outperform**"This point of view was made at the time of the rating.
Ives believes that Apple will become the first company to reach a market capitalization of $4 trillion sometime in 2024. At the heart of his argument is to reinvigorate the growth of the iPhone.
He believes that Apple's revenue in fiscal 2024 will reach $400 billion, an increase of 45%, and revenue will reach $422 billion in fiscal 2025, an increase of another 55%。
Walter Piswick is skeptical. As an analyst and co-founder of Lightshed Partners, he made a prescient judgment about Apple's sluggish fundamentals in March of this year. As it turned out, his judgment was wrong, setting a target stock price of $120.
As Piswick points out, despite Apple's lackluster performance and weak guidance, the company has been emerging recently.
He asked"How many more times will we hear that next year will be a supercycle for iPhone demand?"
He said that there is no indication that there will be oversized demand for the ** chain. He concluded"People didn't do the math of it"。
One of Wall Street's favorite pastimes is fantasizing about Apple's acquisition targets, as the company has a lot of cash and a good credit rating. But Apple's dreams of growth through acquisitions have been shattered time and again. Over the years, Apple has been the subject of numerous deal rumors, but they have never come true except for the $3 billion acquisition of Beats in 2014 (Apple still makes Beats headphones, though rarely talked about the business).
Walt Disney shareholders may want Apple to buy the troubled entertainment giant. But Apple and Cook don't need a $200 billion business, including theme parks, cruise ships and a crumbling cable business.
Wedbush's Ives has suggested that Apple could flesh out its Apple TV+ streaming** service by bidding for Disney's ESPN, but that would certainly not be supported by Apple shareholders. ESPN is facing soaring sports rights costs and declining revenues for cable subscribers.
Years ago, rumors that Apple might buy Tesla have been debunked given the automaker's $760 billion market capitalization, and there's little reason to think Apple would buy another electric or self-driving car company.
On a smaller scale, Apple is sometimes cited as a potential savior for the troubled exercise bike company Peloton Interactive, but the business is too small to have a material impact on Apple's revenue growth.
Morgan Stanley analyst Eric Woodlin agrees that the big buyout is not in line with Apple's character. He said:"Apple wants to build, not acquire. I don't think that's going to happen. "
Apple's excess cash is likely to continue to flow to the same place: as promised since 2018"Achieve net cash neutrality over time"Since then, Apple has been aggressively buyback**, reducing the number by nearly 25%, and its net cash position has fallen from $163 billion to its current $51 billion.
Even among the bulls, there are those who doubt that the Vision Pro is Apple's next great product, at least not at $3499**. Bulls believe that this launch is just a public test, and there will be a more affordable version of the Vision Pro. At that point, they will be even more excited.
Those who are bullish on the Vision Pro believe that Apple can finally figure out a way to bring ** closer to the high-end iPhone (close to $1000) while addressing some of the issues that reviewers have raised about the prototype of the device, particularly its size and comfort.
Gene Munster, founder of Deepwater Asset Management and former Apple sell-side analyst**, said Vision Pro's business will reach $40 billion by 2030, surpassing the current Mac or iPad businessMorgan Stanley's Woodlin believes that in 2030 Apple's"Spatial calculations"The revenue of the sector will reach $20 billion to $70 billion.
Munster said"I think by 2030, the scale will be on par with the Mac. "
It's clear that the Vision Pro can't be in the 2024 fiscal year** Apple's growth disease, or not in 2025 or even 2026.
But in the mixed reality space, Apple isn't the only player. Fascinated by the prospect of artificial reality and the metaverse (met**erse), Zuckerberg renamed his company Meta Platforms. The company's reality lab business, which includes Quest headsets and the Horizon virtual world, now loses more than $10 billion annually. That's not how Apple needs to grow.
Remember the buzz about the Apple Car?Not long ago, speculation about a potential manufacturing partner for Apple's self-driving cars kept coming to the news. In 2015, it was reported that Apple was aiming to launch an electric car by 2019. A 2021 report said that Hyundai Motor Company was looking for a piece of land in Georgia to build a new factory to produce Apple cars.
Neither materialized.
UBS analyst David Vogt said:"The technology is simply not in place. "
This month, Tesla recalled more than 2 million vehicles due to problems with its self-driving features. At the same time, the Apple car has become much less attractive as automakers see a slowdown in sales growth for electric vehicles.
Morgan Stanley's Woodlin does not believe Apple will enter the car market, noting that the car market is highly competitive, with dozens of electric vehicle manufacturers in China alone. He said:"I'm not sure what differentiation really means. "
The best argument for the Apple Car is that it is one of the few product categories that can drive Apple's sales. Next year, Tesla's sales are expected to reach $120 billion. While this figure is still lower than iPhone sales, it will increase Apple's revenue by 30%.
Even without making a car, Apple already plays a significant role in the cockpit of a car, thanks to the CarPlay software, which allows consumers to control the entertainment and navigation system through the iPhone.
Apple has bigger ambitions for CarPlay. At the 2022 developer conference, Apple showed off a new version of the software that will allow Apple to control the entire cockpit display, from the speedometer to the climate control.
But there have been few follow-up reports since then.
Apple's most underestimated growth potential may be in the areas of search and artificial intelligence. The company's current strategy is lucrative when it comes to search, earning billions of dollars from Alphabet and at virtually no cost, in return, using Google as the default search option for iPhones and Safari.
This relationship is the focus of the Justice Department's current lawsuit against Google. The formal debate has ended, but the judge does not expect to rule on the case until the end of 2024. Subsequent appeals could drag on for years.
Woodlin believes that if Google loses the lawsuit, Apple's profits could be reduced by 18%.
It sounds like a nuclear option, but even the possibility of losing that revenue will make Apple consider other options in the search space. With the exception of a handful of small search engines like duckduckgo, there aren't many things Apple can buy, and it's possible that Apple will switch partners to work with Microsoft Bing.
However, the regulatory issues that Google is currently facing could provide an opportunity for Apple to create its own search engine. On the downside, Apple's focus on customer privacy can conflict with search's current business model, precision advertising.
As for artificial intelligence, Siri, Apple's aging personal assistant, could benefit from an injection of AI-generated features that have the potential to expand the range of tasks that Siri can handle beyond just setting alarms and sending hands-free text messages.
Morgan Stanley's Woodlin believes that the emergence of AI-generated models running on mobile phones and PCs could boost sales of iPhones and Macs because they can make these devices more useful and relevant to consumers.
Apple already uses machine learning and artificial intelligence software in several of its products. It has been added to iPhone and Mac processors since 2017"Neural engine"for facial recognition, fingerprint reading, and other applications.
So far, though, Apple has been silent when it comes to AI chatbots and large language models, even as other tech companies have gone all out.
Cook said at the company's November earnings conference:"When it comes to generative AI, we're clearly working. I'm not going to go into the details of what it is, because you know, we don't really do that, but one thing is for sure, we're investing. Our investment is quite large. "
There are other possibilities. Lightshed's Piswick believes that it is possible for Apple to shift the iPhone business to a subscription model that offers a range of services. Alternatively, Apple could find a way to make a big splash in the health and wellness market.
Woodlin believes that Apple could add enough features to the watch, such as non-invasive blood glucose monitoring, to make it a reimbursable medical device.
Wall Street tech columnist Walter Mossberg said:"They had to come up with a great new product, and it couldn't be a $3500 set of goggles. "
He doesn't think cars are the answer either. "They had to put themselves in their shoes, which was the guiding principle of the second Jobs era. "
Mossberg believes that Apple may decide to compete with Samsung Electronics in the foldable phone space, or launch a phone with a scrollable screen"Their tradition is that they are a product company, not a service company"。
He said that Apple might even be on the right path with the core elements of the Vision Pro, which is the mixed reality world and the virtual world, if the company can find a way to do it with a more appealing device"They may have a product that is unique in the world"。
Apple's next great product may even pop up and change everything again, just like the iPhone once did.
In his commencement speech at Stanford University in 2005, Jobs said:"You can't look forward, you can only look backwards. Therefore, you have to believe that in your future, the dots will be connected in some way. You have to believe in something, your intuition, fate, life, karma, and so on. This approach has never let me down. "
For now, Apple's investors are maintaining this belief. However, it has been a long time since the Jobs method has worked wonders at Apple. At some point, probably as soon as 2024, the market needs to see results.