Why is Apple Stock so Expensive?

This is why you shouldn’t invest in the new iPhone.

Andrew Willis 15 September, 2023 | 4:32AM
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Key Takeaways for Apple Stock:

  • We’re keeping our eyes on whether Apple can grow its customer base with the iPhone 15.
  • Our projected revenue growth rate for the iPhone segment is doubled by services and dwarfed by accessories over the next five years.
  • Apple stock investors should anticipate a small decline in revenue in 2023 – but keep in mind that it’s relative to a very strong 2022.

 

Andrew Willis: A post shared on social media recently showed a packed Huawei store in China across from a relatively empty Apple (AAPL) store... First of all, I’d like to see the same comparison with the iPhone 15 now announced, but since emerging markets are an important source of growth for Apple’s iPhone segment, it does beg the question: Is the iPhone losing any ground?

Should Investors be Buying the New iPhone?

Judging by the price of Apple stock in the lead-up to the latest iPhone announcement, investors remain confident in Apple’s smartphone segment. But if they’re betting based on the new iPhone, they might be wrong. Not because the iPhone won’t sell, but because other Apple businesses may do better.

Services like Apple TV and music are expected to experience a compound annual growth rate of 6.5% over the next five years, compared to only 3% for the iPhone. We also expect accessories to grow at a rate of 17% over the next five years. In the near term, as these businesses accelerate and sales of the old iPhone wane, sector director Brian Collelo expects overall Apple revenue to be down 2% in fiscal 2023.

Will the new iPhone change Apple’s revenue growth trajectory in 2024? Maybe, but with the company’s growing online ecosystem, you won’t need to compare crowd sizes.

For Morningstar, I’m Andrew Willis.

bulls Apple Bulls Say

  • Between greater smartphone penetration in emerging markets and repeat sales to current customers, Apple has plenty of opportunity to reap the rewards of its iPhone business.
  • Apple's iPhone and iOS operating system have consistently been rated at the head of the pack in terms of customer loyalty, engagement, and security, which bodes well for long-term customer retention.
  • We think Apple is still innovating with introductions of Apple Pay, Apple Watch, Apple TV, and AirPods; each of these could drive incremental revenue, but more crucially help to retain iPhone users over time.

bears Apple Bears Say

  • Apple’s decisions to maintain a premium pricing strategy may help fend off gross margin compression but could limit unit sales growth, as devices may be unaffordable for many customers.
  • If Apple were to ever launch a buggy software update or subpar services, it could diminish the firm's reputation for building products that "just work."
  • Apple is believed to be behind firms like Google and Amazon in artificial intelligence, or AI, development (notably Siri voice recognition), which could be problematic as tech firms look to integrate AI in order to deliver premium services to customers.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Apple Inc218.54 USD-2.88Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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