Most analysts today agree that Apple shares are a strong buy. The WSJ predicts Apple stock will go as high as $185.
The past decade has indeed been excellent for the California-based company. Since it first introduced the iPhone way back in 2007, the company has broken all sorts of financial records, which have propelled its stock price year after year. The company recorded the highest ever quarterly profit – an enormous $18.4bn – in 2016, reached a record market capitalisation of $800bn earlier this month and has gained about 34% since the beginning of the year.
However, on Wall Street, many are starting to wonder how long Apple can sustain its dominance. Since Steve Jobs’ death in 2011 Apple’s ability to keep its market leader position has been continuously questioned, so this is nothing new for the company. Nonetheless, the question remains: are the renewed doubts at all justified or are they simply pessimistic noise?
The Case for APPL
Earlier this year, Apple reported that it owns the biggest cash pile in corporate history, accounting for some $246.09bn. Having this giant cash cushion gives Apple a safety net for the future, and with Donald Trump toying with the idea of reforming US repatriation taxes, the company could end up bringing all this money back home, for future use.
However, to truly understand what’s in for Apple in the future, one must dissect the cause of its success and see whether it can continue. Apple’s boom can clearly be attributed to their business strategy; the company is all about user experience and brand value.
Apple is a beacon of vertical integration in its supply chain. It designs and develops everything from their own operating systems to their own hardware. On top of this, Apple integrates all its devices and produces easy-to-use products that are loved by the masses. Since Apple is in complete control of essentially their whole production process, it is able to innovate at whatever rate it desires.
Apple’s strategy has allowed it to enjoy strong pricing power over the years. Combining this with low production costs, Apple has been able to push the industry margins considerably. For example, the iPhone 7 sells for around $649 and costs Apple approximately $225 to make. It is a small wonder that the company has such an enormous cash pile.
The Case against APPL
Apple’s product portfolio includes its music service, iPods, iPads, Macs, accessories and its flagship product, the iPhone. Despite this diversification, most of its revenue comes from iPhone sales.
The following graphs depict Apple’s revenue shares in recent years.
Astonishingly, 60% of Apple revenue in Q3 2016 came from iPhone sales alone. This brings considerable risk to Apple’s operations.
Last year there was a drop in iPhone sales across the first three quarters. If this trend continues and Apple cannot remedy it through increased sales of iPhones or other products, the stock will most likely start to suffer.
The Short Term
In theory, if the upcoming iPhone 8 does not sell well, it could signal the start of a decline for Apple shares. In reality, however, forecast sales of the future iPhone 8 point towards new records. Apple’s business model is still rock solid, and investors clearly have faith that the company will continue to innovate. Overall, it seems that Apple investors have precious little to worry about.