All eyes are on Apple’s (NASDAQ:AAPL) upcoming iPhone 14 launch event – dubbed “Far Out” – coming Wednesday (September 7th). Far Out will mark the company’s first major product launch presentation this year, materializing on hints delivered through earlier software debuts this year at “Peek Performance” and “WWDC 2022“. It will also serve as a preview to another slate of new products on the verge of unveiling coming October – including the highly anticipated line-up of new iPads and Macs featuring updated Apple silicon – to complete what is expected to be one of the company’s biggest launch years on record.
Far Out will be a chance for Apple to prove its market leadership and accompanying fundamental strength, which are key to weathering the near-term consumer slowdown, and delivering sustained long-term growth that will support its valuation prospects. Yet, the stock has continued to decline in recent weeks in tandem with the broad-based market selloff following the Fed’s warning of further policy tightening to tame inflation, which has heightened market fears of a structural economic downturn ahead.
But Apple’s consistent track record of outperformance and resilience as observed in recent quarters is expected to persist. The following analysis will dive into Apple’s unwavering brand power, its growing iPhone installed base, and strong balance sheet – the three critical inputs to sustaining longer-term upsides for the stock.
Apple has built a robust brand over the years with the successful launch of a key slate of devices spanning music players, smartphones, smartwatches, and audio devices that have time and again disrupted and overtaken market share from traditional predecessors. Not only is the brand’s success built on its reputation for quality, but Apple has also gone out of its way to ensure seamless integration across its broader ecosystem of offerings to ensure returning purchases, which is critical to offsetting the years-long lifecycle of many of its products (e.g. average iPhone upgrade cycle is approximately three to four years; average Mac upgrade cycle is approximately five years). And this has continued to set the core foundation for its brand loyalty across global households, underpinning a certain level of guaranteed success whenever new products / services are launched (remember last year’s frenzy on the $19 Polishing Cloth?)
While Apple has typically maintained a tight-lipped approach on projects in the works, with no significant pre-launch marketing until the moment a new product is ready for sale, its brand reputation has always come through on securing demand. And the same is expected for the highly anticipated slate of new segment launches over the near- and longer-term:
The Apple Watch has played a critical role in boosting Apple’s Wearables, Home and Accessories product segment into the size of a Fortune 120 company in the few short years since its launch in 2015. With continued improvements made to the wearable device, including a wide array of health-centric features spanning Heart Health tracking to fitness offerings, the Apple Watch has quickly become an industry favourable, dominating the smartwatch market with close to a 40% share of global sales.
The much anticipated launch of a heavy-duty version of the smartwatch – or Apple Watch Pro – at the upcoming Far Out event targeting athletes is expected to further Apple’s market share in the segment, and overtake extreme sports and outdoor technology rival Garmin’s (GRMN) leadership in the premium tier “for [smartwatch] models that cost $500 and up“. Although Apple has yet to provide any official confirmation on the Apple Watch Pro’s debut, much of the software updates provided during this year’s Apple events have already “laid the bread crumbs” for what to expect:
Apple has been ramping up investments into development new technology offerings for its wearable products in recent years to address increasing user focus on health and fitness features. The company has introduced the “Sleep App” during WWDC 2022, a highly requested suite of features by Apple Watch users. The Sleep App encompasses offerings such as heart-rate monitoring and sleep stage tracking to generate real-time data on a users’ sleep patterns.
The company has also enhanced its Heart Health offerings, including the introduction of “AFib History”, which keeps track of atrial fibrillation detected through the Apple Watch to help users and health providers pinpoint certain heart issues. The embedded feature in the Apple Watch has also been FDA approved after a study showed 98% accuracy, a significant milestone in verifying the device’s ability in saving lives.
Apple has also introduced “Medications”, an app that allows Apple Watch users to track medication records, enable reminders to take medication, and log daily intakes. The app also features drug interaction warnings, providing information to users about certain side effects of drug intake logged through the app…
The potential release of a heavy-duty smart watch targeting extreme sports athletes is also corroborated by watchOS 9 enhancements discussed earlier. These include new health and fitness-oriented upgrades such as “Multisport” to facilitate automatic tracking between swimming, biking and running, as well as elevation tracking, training and heart-rate zones to monitor workout intensity, and enhanced swim efficiency tracking tailored for professional swimmers.
Source: “Apple: Have You Seen These Images? Part II“
And thanks to Apple’s brand power, the impending launch of the Apple Watch Pro is expected to build on the standard Apple Watch’s proven reputation for quality and convenience, expanding the company’s addressable market on smartwatches, while also driving adjacent revenue growth in its higher-margin services segment. As mentioned in our previous coverages, Apple has been bolstering its service offerings to better capitalize on opportunities stemming from increasing demand for digitized media and entertainment, as well as accessible health features in recent years, paving a solid trajectory to recurring high-margin sales that are poised to take its long-term valuation upsides further. This has been further corroborated by sustained double-digit growth observed in Apple’s Services segment sales in recent years, which has expanded faster than its hardware sales over the same period to contribute almost a quarter of the company’s consolidated revenue mix, underscoring the company’s continued success in “maximizing [device] installed base monetization”.
While Apple’s mixed-reality headset is not expected to hit markets until 2023, it has already garnered significant interest thanks to the company’s historical reputation for pushing nascent technologies into mainstream adoption. The impending product has already been pegged as a high-potential disruptor to Meta Platforms’ (META) Quest 2 – the best-selling VR headset today with 90% market share as of the first quarter – based on nothing but speculation thanks, again, to Apple’s brand power. The broader AR/VR industry has also expressed their view that the metaverse will not enter mass market adoption until “Apple enters the race” – even Meta CEO Mark Zuckerberg has acknowledged that his company and Apple “are in a very deep, philosophical competition to build the metaverse”.
As mentioned in the earlier section, Apple has largely remained tight-lipped on projects in development – including its mixed-reality headset – and has yet to provide any solid confirmation on the device’s production progress nor debut timeline. Yet, news reports that the product has already been presented to the board for preview in mid-May and recent trademark registrations submitted by Apple for “Reality One”, “Reality Pro”, and “Reality Processor” collectively point to that fact that the tech giant’s foray into the nascent segment is inevitable, putting Meta on notice.
Over the next five years, metaverse opportunities are expected to grow into an $800 billion market, with related headset sales alone reaching $100 billion. While Apple’s flagship mixed-reality headset is not expected to be a core contributor to the company’s near-term fundamental performance due to its lofty sticker price estimated at $2,000, the company’s foray in the emerging segment is expected to pay large dividends over the longer-term:
At early stages of debut, Apple’s flagship mixed-reality headset is estimated to come off the gates with a sticker price as high as $2,000. It is speculated the company currently anticipates related sales at a rate of “one unit per day per Apple retail store”, which is equivalent to about $365 million in related revenues in the first year based on the company’s map of about 500 retail stores, excluding other sales outlets (e.g. online, sales partners, etc.). Although the figure starts off relatively nominal compared to Apple’s consolidated revenues, which topped $365 billion in fiscal 2021, it is expected to pick-up rapidly and accelerate towards $30 billion within five years based on historical growth trends observed in new product launches from five years back. Preliminary projections are expecting Apple’s foray in mixed reality opportunities to boost its valuation by at least $150 billion. And over time when metaverse trends continue to gain mainstream traction, Apple is expected to generate more than $200 billion in annual revenues from the AR/VR segment, which underscores further upside potential for the stock over the longer-term. Paired with Apple’s massive existing installed base of devices and related service platform users, the company is undoubtedly a key gateway to bringing emerging technologies like AR and VR to the mainstream.
Source: “Apple: Have You Seen These Images?“
Considering an $800 billion metaverse market by mid-decade, with headsets contributing $100 billion, the anticipated demand underscores massive growth headroom coming from adjacent software sales – another strong plus to Apple’s goals of expanding its Services segment to bolster long-term valuation prospects. Although the highly anticipated mixed-reality headset may seem like Apple’s initial venture in AR/VR opportunities, the company has long been preparing its ecosystem of supporting software, apps and service platforms to ensure adequate monetization from its entry into the new segment.
As discussed in our previous coverage, Apple has been rolling out developer frameworks and APIs targeting AR/VR apps for use in its branded devices in recent years, including Metal and Reality Composer. The company has also been speculated to be prioritizing the development of “user interface elements like body tracking, hand tracking, gestures, hand-based typing, and Siri access” that can be easily integrated into third-party apps for compatibility with Apple’s future AR/VR devices. Apple’s steadfast commitment to ensuring seamless integration across its ecosystem of product and service offerings, paired with the company’s historical adoption of a “more informed approach” on entering and disrupting emerging technology trends through observation of early-entrants’ experiences first, continues to corroborate the value of the brand’s reputation for optimized success rates in catapulting nascent innovations into the mainstream.
The value of Apple’s brand power is also observed through market’s excitement over the company’s potential foray in electric autonomous mobility. Again, the sentiment is that if any company will succeed in disrupting a new product segment, it will be Apple, underscoring the solid foundation for the stock’s long-term valuation prospects.
In a recent survey conducted by research firm Strategic Vision, more than a quarter of American car owners have indicated interest in buying an Apple car, with a meaningful portion of respondents alluding their support to the brand’s reputation for quality. Even current electric vehicle leader Tesla (TSLA) is at risk of losing its crown to Apple – more than half of Tesla vehicle owners surveyed have indicated a definite interest in Apple’s future foray in autonomous mobility.
The immense interest garnered for Apple’s not-yet-existent product already foreshadows guaranteed success should the brand successfully launch its first electric self-driving car by mid-decade as planned. The anticipated launch timeline of the Apple Car is expected to coincide with accelerated global adoption of autonomous mobility, a market that is expected to reach $200+ billion over the next five years. And again, latching onto its existing interconnected ecosystem of supporting product and service offerings will be key to attracting demand for Apple’s next-generation product launch, given its extensive consumer reach through an active global installed base of close to 2 billion across its products segment:
The eventual car will likely feature homages to Apple’s existing product portfolio, like an “iPad-like touch screen” infotainment system. And on the technology front, Apple is believed to have completed the development of a custom silicon for powering the vehicle’s autonomous driving capabilities. The newest chips will soon be implemented into its existing fleet of retrofitted SUVs for testing in California according to the state’s DMV, a sign that the impending launch is near.
Source: “Apple Stock: The Strongest Shield Against Rate Hikes“
The company’s latest upgrade to Apple CarPlay also highlights its intentions to bolster its ecosystem of complementary features for the potential debut of its flagship vehicle in future – similar to the ecosystem of supporting software and service platforms prepared years in advance for the impending launch of its mixed-reality headset as discussed in the earlier section:
The iOS 16 update will allow Apple CarPlay to facilitate projection of content on “multiple screens within the vehicle, creating an experience that is unified and consistent”. The development is consistent with the evolution of increasingly connected vehicles in recent years, and again focuses on enhancing users’ ability in curating a personalized in-vehicle experience. Additional Apple CarPlay features, and vehicle compatibility will be announced starting late next year.
Source: “Apple: Have You Seen These Images? Part II“
Despite our repeated reference of Apple’s historical success in new product launches to its integrated “ecosystem” of product and service offerings, this ecosystem ultimately ties back to the iPhone. The iPhone is essentially the anchor to every other device and service category offered by Apple. And the continued growth of its iPhone installed base underscores the tremendous adjacent revenue opportunity for Apple over the longer-term:
On paper, Apple makes about 50% of its revenue from the iPhone, but the actual percentage is far higher. That 50% number represents cash made by selling actual iPhone units, ignoring the device’s impact on other products…and a new phone can spur shoppers to buy additional accessories.
Apple has continued to gain share in the smartphone market this year, defying broad-based declines observed across the industry due to a waning consumer end-market. The combination of global supply chain constraints and declining consumer disposable income amid record-high inflation has caused smartphone shipments to plummet this year. Yet, Apple has continued to grow its iPhone sales on both a unit and dollar basis. As mentioned in our latest coverage on the stock, Apple’s iPhone take-rates have been relatively resistant against near-term recession risks compared to the lower-end smartphone market. The sustained iPhone market share gains is further corroborated by its robust take-rate in the U.S. – more than half of Americans now use an iPhone, beating long-time rival operating system Android.
And this is why the upcoming Far Out launch event – and every other preceding iPhone launch presentation – is so critical to Apple. Not only is it a presentation to showcase every new upgrade to the iPhone – whether it is the embedded silicon, the camera, or the exterior – Far Out also represents an opportunity for Apple to reinforce the device’s role as the “engine” to the company’s moat. While consumers are still keen on upgrading / switching to the newest iPhone 14 family of smartphones, with demand helped by an additional push from broad-based 5G transition, Apple’s ultimate win will be on the higher-margin service revenues and adjacent accessory sales ensuing from the smartphone segment’s continued growth:
[Morgan Stanley] assumes that Apple users will spend $2 per day on Apple products or services, a figure already achieved by US iPhone owners. The current stock price implies a material valuation discount to other tech platforms and software-as-a-service businesses.
The iPhone is essentially the core driver of Apple’s flywheel business model – the iPhone enables demand for adjacent services and accessories, while continued improvements made to adjacent services and accessories reinforce long-term iPhone demand. Paired with iPhone customer satisfaction levels that are consistently holding near 100%, demand for Apple’s ecosystem has become increasingly sticky despite near-term macro headwinds, underscoring the company’s sustained long-term growth trajectory, and accordingly, the stock’s bullish thesis.
And finally, while the currently volatile macro climate has caused a sharp shift in investors’ preference for profitability over “growth at all costs”, Apple checks both.
The company has demonstrated a consistent track record in producing generous returns from investments over past years, bolstering a balance sheet of $60 billion in net cash as of its latest fiscal quarter-end to support continued innovation needed for sustaining its long-term growth trajectory. Given the latest market downturn, Apple’s robust net cash position enables the company to partake in growth investments under the low-valuation market backdrop “without having to incur incremental capital costs” ahead of rapid interest rate hikes. As discussed in our previous coverage on how tightening monetary policies will impact Apple’s long-term valuation outlook, the company’s robust checkbook is expected to further cement investors’ confidence in the stock, as they continue their “flight to quality” under continued market pressure from tightening economic conditions ahead.
While Apple is not immune to near-term macro headwinds, its long-term growth theme remains intact. The company has time and again demonstrated its resilience against market and supply chain challenges through sustained fundamental outperformance.
In addition to building robust brand loyalty, a technology moat anchored by continued iPhone growth, and one of the industry’s strongest balance sheets, Apple’s success is also reinforced by its strategic execution of day-to-day operations down to the retail level. For instance, Apple’s incorporation of gift card rebates during last year’s holiday sales was a strategic move at the operational level to mitigate the adverse impact of protracted inventory shortages – instead of offering one-off discounts for customers that could have been lost to competitors, gift card rebates secure future sales to Apple. Implementation of similar strategies at the operational level during the first half of the calendar year has likely played a critical role in Apple’s outperformance during the June-quarter as well, where lost sales due to ongoing supply shortages and macro headwinds came in below the previously projected range of $4 billion to $8 billion.
With supply constraints and economic weakness remaining the near-term theme, we expect the company to continue execution of similar strategies at the operational level to reduce impact from related headwinds, while maintaining the three critical drivers of its valuation – brand power, sustained iPhone demand, and robust balance sheet – to unlock renewed upsides for the stock.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.