Apple investors have had a year unlike Apple’s, but at least one analyst thinks that will change in 2023.
The tech giant’s stock has fallen 25% in 2022, trailing the 19% drop in the S&P 500.
The drop comes as Apple is often seen as a safe-haven investment, as it has a formidable cash-filled balance sheet and a steady stream of repeatable services revenue.
But just like other big companies, the unstable global economic backdrop has hit Apple in the form of slowing iPhone and accessory sales, as well as production delays outside of COVID-19-stricken China. .
Apple shares are now trading at a forward price-to-earnings ratio of 22, about a 21% discount from its historical average. At 16 times enterprise value to EBITDA, Apple shares are trading at a 17% discount to their historical norm.
The more compelling valuation of the mighty Apple caught the eye of longtime technology analyst Jim Suva at Citi.
“We believe demand for Apple’s products and services should remain resilient through FY23. a fundamental risk. withdrawal of stock futures that we would view as an opportunity to buy Apple stock,” Suva wrote in a new 20-page report to clients.
Suva reiterated a Buy rating on Apple with a price target of $175, which assumes an upside of around 30% from current levels.
Suva added, “Apple’s current market value does not reflect new product category launches. This will change with the launch of the new AR/VR headset in 2023 and foldables in 2024.”
Here are the six factors behind Suva’s bullish call to Apple in 2023.
Here comes India: An unappreciated factor in Apple’s future growth is India, says Suva. The biggest bullish factor on India, says Suva, is the growing wealth of the country’s population. “India’s upper-middle and upper-income class, with incomes over $8.5,000, is expected to double from 25% of its households to over 51% of total households (~200 million These households are expected to increase six-fold consumer spending, from 37% of current spending ($1.5 trillion) to 61% of $6 trillion by 2030. Middle- and upper-income households would result in nearly $4 trillion in additional consumer spending by 2030. Overall, there will likely be nearly $2 trillion in additional spending on mid-priced affordable offerings, alongside $2 trillion additional spending driven by consumers upgrading to premium offerings or adding new consumer categories,” says Suva.
iPhone sales growth: Suva says sentiment on iPhone demand has become too bearish. “Investor sentiment towards consumer tech hardware is very austere, with many believing the strong growth seen across iPhones over the past two years (+23% CAGR in revenue) expected to see steep declines as macro inflationary pressures take a We don’t believe this is the case, in other words, we don’t expect a repeat of FY2016 or FY2019 when revenues fell by around 10-15%,” writes Suva. The analyst uncovers several reasons for his more optimistic view. “Our view is that the installed base of Apple’s iOS ecosystem is now much larger, implying an installed base of over a billion iPhone users. Additionally, our research does not indicate that smartphone replacement rates are increasing (compared to recent levels) and holding steady. , and in some cases even shorten overall,” adds Suva.
Increase in service sales: Research from Suva shows that Apple’s service sales growth has slowed in 2022, in part due to the slowing economy. But that could change in 2023. “We expect the price increases that were implemented in the last quarter to take effect in the coming quarters and drive revenue growth,” Suva said of the service sector. .
These new products: “We expect Apple to launch an AR/VR headset in 2023,” Suva said. The analyst says improvements in 5G connectivity and a competing Oculus offering from Meta are the main reasons Apple will finally enter the market. Any product announcement along those lines could boost the stock, Suva thinks.
Exaggerated regulatory risk: Recent reports claim that to comply with the Digital Markets Act in Europe, Apple may allow alternative app stores on its iPhones and iPads. Suva believes the impact on Apple’s mainstream App Store business is overstated. According to Suva: “In our view, several factors may limit the impact of these non-store billing options, including consumer behavior which we believe tends to be persistent, particularly with respect to the ability to pay and manage their subscriptions securely in one place.”
Cash gifts: Suva thinks Apple is about to drop the mic when it returns money to investors next year. “With free cash flow of approximately $110 billion+ per year and net cash of $49 billion (at the end of FY22), we expect Apple’s cash vault to support the minus $110 billion more in shareholder returns per year, or 4-5% of its current market capitalization in the form of buybacks and dividends.In the spring of 2023, we expect Apple to announce a buyout of additional $85 billion in equity after rolling out about $90 billion in fiscal 2022. We also expect the company to increase its dividend by 10%,” Suva writes.
Brian Sozzi is editor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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