A lot has been stated about inflation. Consumer prices are jumping at the highest rates in a decade. This has given rise to concerns amongst certain investors, particularly growth investors.
As interest rates rise, so too does the discount rate used to discount future earnings back into the present. For growth stocks with less of a track record but high future expectations, that’s not a good thing.
However, there are still a number of high-quality growth stocks with dependable cash flows and rock-solid balance sheets to consider right now. Chief among these is a stock I remain very bullish on, Apple (AAPL).
Valuation and Fundamentals
When assessing Apple stock, it’s easy to look at the shiny electronics the company sells and lose sight of what’s driving this business forward. First of all, the Apple brand is among the best brands in the world. The company’s customers are also among the most loyal out there, providing Apple with a competitive moat and pricing power unlike many of its competitors.
Apple has leveraged this loyal customer base, providing a growing ecosystem of products and services (emphasis on services) to grow its revenue and earnings every year. With pricing power and growing market share, Apple has turned from a niche producer of luxury items to a household brand.
This sort of pricing power is important to emphasize. Given inflation concerns, many companies selling mass-produced, lower-end items don’t have that kind of ability to raise prices.
As component costs increase for electronics, many companies in the same line of business will find it hard to remain profitable. For Apple, the question is simply how much do we raise prices, not if we raise prices.
Is a Bigger 5G iPhone a Big Deal?
There are a number of sources that have recently released some speculation of what the next-generation iPhone will look like. Expectations are that this model will be referred to as the iPhone SE 5G or iPhone SE 3.
Unsurprisingly, the third-generation model is likely to resemble the iPhone SE that Apple released in 2020. Given the lack of relative differentiation with recent iPhone launches, the average age of an iPhone has widened from around 2 years, to approximately 3.5 years as per recent reports.
Whether this new iPhone launch provides enough of an impetus for investors to jump aboard the new model remains to be seen.
However, leaks suggest that Apple has decided to equip this year’s iPhone SE with the A15 Bionic from the iPhone 13 series and the iPad mini 6. Additionally, the company is considering releasing the next iPhone SE in multiple markets, including India.
There’s little indication right now about a release date, though typically these new models are released prior to the holiday shopping season.
For now, investors looking forward have a lot to anticipate with Apple. The discussion in some circles around this stock is centering on the idea of innovation again.
Apple will need to entice users to upgrade their existing phones for growth to accelerate. Whether or not that’s possible remains to be seen. However, doubters who have relied on a “lack of innovation” argument in the past have been very disappointed in recent years.
Apple’s Thriving Service Segment
One of the reasons for this disappointment is Apple’s burgeoning Services segment. Once a small portion of Apple’s overall business, the company has grown its Services unit (including subscription-based services) to its second-largest business, behind the iPhone.
The company’s Services segment delivered $68.4 billion in revenue in 2021, representing 27.3% growth compared to FY 2020. One of the significant perks of this segment is that it features juicier margins than Apple’s rest of the business segments.
For the full-year 2021, Apple’s gross margin improved to nearly 42%, driven by growing Services revenues. As the company looks forward to the future, this segment will continue to play a big role in Apple’s earnings growth trajectory.
Don’t Ignore this Stock
Every company faces headwinds, and Apple is no exception. Supply chain issues and demand for the company’s core products remain uncertain.
Apple recently cut its production estimates for its recent iPhone, despite delivering stellar results once again, mainly due to the tech giant’s improving revenue mix.
Apple has found a way to continue to perform well in the face of these headwinds. However, the potential for revenue and earnings growth slowdowns remain a potential investors ought to consider.
There’s always the potential for economic turmoil around the corner, and a more hawkish monetary policy environment certainly points to a slowing economy, which may not be good for Apple.
Wall Street’s Take
As per TipRanks’ analyst rating consensus, Apple is a Strong Buy. Out of 27 analyst ratings, there are 22 Buy recommendations and five Hold recommendations.
The average Apple price target is $192.42. Analyst price targets range from a high of $215 per share to a low of $161 per share.
Bottom Line
Apple is undoubtedly a world-class brand with a loyal customer base. This company continues to defy expectations, and will likely continue to do so, barring some sort of catastrophic macro event outside of Apple’s control.
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