Is Now the Time to Buy Apple Stock?

Price Target: $188 (21% upside) 

Current Price: $157

Target Date: Q2 2024

Stock:  Apple ($AAPL)

With the market as volatile as it has been, we're pushing back on some of the "growthier strategies" we've had, in favor of more defensive plays in the stock market. 

For us, this is the exact right time to examine our position in Apple ($AAPL), as we're a solid ~6 months away from their new product cycle with the iPhone 15.

This is usually the moment the hype cycle starts at Apple, and therefore the last chance we can jump on the train before the stock spends the back half of 2023 being mildly overvalued. 

And for us, a multi-year view ahead for Apple contains a lot of big changes, as we finally start watching big tech prepare for what the latter half of the 2020s and 2030s will be like structurally. 

Apple is at the beginning of two key inflection points that will determine its growth trajectory for the next decade. 

Meanwhile, their manufacturing and demand cycles have been out-of-whack lately as they figure out how to source and build their devices going into the next 5 years.

This has helped further drive the stock into undervalued territory. 

So, let's take a long look at Apple and see if it's worth buying now ahead of what's shaping up to be a volatile product hype cycle.  

Let's explore the details below 👇 

Apple's Rough Year:

Looking at the chart above, it's obvious 2022 was a tough ride for Apple stock.

The twin pressures of supply chain and FX (foreign exchange) really ate into Apple's historically high margins.

Furthermore, demand started to compress a little as the average upgrade cycle for iPhone customers slipped to be greater than 4 years.

iPhones simply are not changing enough from generation to generation for consumers to justify buying a new phone. 

Meanwhile, Apple is trying to stand up new manufacturing operations outside of China as the future of our relationship is a little murky at best, driving costs up even further.

This has led to the first period of genuine volatility we've seen at Apple since 2007. The market is simply having a hard time precisely valuing the world's most valuable company. 

Due to the more fearful environment, our analysts are putting more stock in the overweight thesis that Apple is being unfairly undervalued while the market waits for a more concrete narrative around where Apple is moving in the next few years. 

So let's get more into the meat of that thesis.

How will Apple change the narrative around its stock and get back to consistent returns?  

Two Big Shifts:

For us, we don't even need to focus on the macro environment, we need to focus on two things that have been developing at Apple for a while now:

• A switch to more of a subscription model.  Apple has lived and died on hardware upgrade cycles. Thanks to their utility and replaceability, Airpods became one of the single most valuable products of all time in the late 2010s. However, upgrade cycles have been slipping as the broader consumer has bailed on discretionary purchases. It used to be that the average replacement cycle for iPhone customers was ~3.5 years. Now industry data suggests that it has slipped all the way to 4.4. The bigger the number, the fewer repeat customers Apple has and Apple is clearly watching this closely. 

  • We've been watching rumors about a true hardware subscription tier coming from Apple for well over a year now, but industry reports suggest that may actually be coming this year (and even within the next few months.) A true subscription service changes the game at Apple completely.

  • Rather than the current rent-to-own scheme Apple currently has via Apple pay, this would be a true rental service with services bundled in beyond just the standard phone and Apple care. This would be huge because right now the market values Apple as more of a hardware play, whereas subscription business models have more guaranteed recurring revenue and therefore are priced at a way higher multiple.

  • With Apple TV, Apple Music, and other services, Apple has been clearly building towards a value proposition for a subscription model for a while now and a year of lightly compressed consumer demand feels like the perfect time to execute on it.  

• New Products: The iPhone 15 is set to push the replacement cycle back within 4 years. Meanwhile, Apple's rumored VR/AR headset is looking more and more real every day. While the metaverse hasn't made any big splashes for--uh--Meta, Apple has the branding necessary to make AR appealing to consumers. A lot will depend on exactly how their AR headset is branded, but we're frankly just excited to see something, anything new coming out of Apple this year. 

Combined, these two shifts alone have the power to reset how the market currently values Apple. 

Apple Outlook:

And these shifts only reflect what Apple is in control of.

Any positive movement on the supply or foreign exchange side of the equation will also drive the value of Apple stock up as we move through this difficult period.

Fear may be ruling market sentiment right now, but we are still standing on fairly sound fundamentals that make blue-chip investments like Apple a solid move. 

Apple is the class of company that will always have a path to a strong value proposition.

The key with AAPL is ensuring that you enter positions during moments of relative weakness.

We like where the stock is now and where it'll move as Tim Cook and the executive team respond to where the market is pushing us. 

Risk/Reward: Medium/ Medium

Rating: Overweight

Market Cap: $2.42T

Dividend Yield: 0.6%