Investors in Apple have had an un-Apple-like year, but at least one analyst thinks that will change in 2023.
The tech giant’s shares have fallen 25% in 2022, following the S&P 500’s 19% drop.
The decline comes despite the fact that Apple is often seen as a safe-haven investment, as it boasts a formidable cash balance and a steady stream of recurring service revenue.
But just like other major companies, the volatile global economic backdrop has hit Apple in the form of depressed sales of iPhones and accessories, as well as production delays from covid-19-hit China.
Apple stock now trades at a forward price-to-earnings ratio of 22, a discount of about 21[ads1]% to its historical average. At 16 times forward enterprise value-to-EBITDA, Apple’s stock trades at a 17% haircut to its historical norm.
The more compelling valuation of mighty Apple has caught the attention of longtime technology analyst Jim Suva at Citi.
“We believe demand for Apple’s products and services is likely to remain robust throughout FY23. We acknowledge that regulatory risks remain a large overhang on the stock, but we view these as overarching risks rather than fundamental risks. Such headlines could provide a near- term stock pullback which we would see as a buying opportunity for Apple shares,” Suva wrote in a new 20-page report to clients.
Suva reiterated a buy rating on Apple with a $175 price target, which assumes roughly 30% upside from today’s levels.
Added Suva, “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 positive 2023 call for Apple.
Here comes India: A slightly undervalued 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 class and upper middle class, with incomes of $8.5,000+, are expected to double from representing 25% of households to more than 51% of total households (~200 million). These households are expected to increase spending by six times from to represent 37% of current spending ($1.5 trillion) to 61% of $6 trillion by 2030. Middle-income and high-income households will drive nearly $4 trillion of incremental consumer spending by 2030. Overall, it is likely to be nearly 2 trillion dollars of incremental spend on mid-priced affordable offerings, paralleling $2 trillion of incremental spend led by consumers upgrading to premium offerings or adding new spend categories, says Suva.
iPhone sales growth: Suva says sentiment on iPhone demand has become too bearish. “Investor sentiment across consumer tech hardware is very strong, with many believing that the overall strong growth in iPhones over the past two years (+23% revenue compounded annual growth rate) is likely to see sharp declines going forward as macro inflationary pressures take a bite out of consumer spending. We do not think this is the case, in other words we do not expect a repeat of FY2016 or FY2019 when revenues fell by ~10-15%,” writes Suva. The analyst reveals several reasons for his more optimistic view. “Our view is that the installed base of Apple’s iOS ecosystem is significantly larger now, implying an installed base of 1 billion plus iPhone users. Additionally, our research does not indicate that smartphone replacement rates are lengthening (compared to recent levels) and remains stable. , and in some cases even shortening overall,” adds Suva.
Sales increase for services: Suva’s research shows that sales growth for Apple’s services has cooled in 2022, partly due to a slowing economy. But that could change in 2023. “We expect that price increases that were implemented last quarter will take effect in subsequent quarters and will drive revenue growth going forward,” Suva says of the services business.
These new products: “We expect Apple to launch an AR/VR headset in 2023,” says Suva. The analyst points to improvements in 5G connectivity and a competing offering from Meta’s Oculus as the main reasons why Apple will finally enter the market. Any product announcement in this direction could drive the stock, Suva believes.
Regulatory risk exaggerated: Recent reports claim that in order 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 dominant app store business is excessive. Suva says: “In our view, there are several factors that could limit the impact of these off-store billing options, including consumer behavior that, in our view, tends to be sticky, especially when it comes to the ability to pay and manage their subscriptions in a secure way. in a place.”
The cash distributions: Suva believes Apple is ready to drop the microphone when they return money to investors next year. “With free cash flow of ~$110 billion plus per year and net cash of $49 billion (at the end of FY22), we expect Apple’s cash pile to support at least $110 billion plus in shareholder returns per year, which is 4-5% of its current market capitalization in terms of buybacks and dividends. In spring 2023, we expect Apple to announce an incremental share buyback of $85 billion after distributing ~$90 billion in FY2022. We also expect the company to increase its dividend by 10%,” writes Suva .
Brian Sozzi is a major editor and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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