by Investors at Apple have had a year like no other, but at least one analyst thinks that will change in 2023.
The tech giant’s stock fell 25% in 2022, surpassing the S&P 500’s 19% decline.
The drop comes despite the fact that it’s often seen as a safe-haven investment, as Apple boasts a great cash-filled balance sheet and a steady stream of repeatable services revenue.
But just like other big companies, the volatile global economic backdrop has hit Apple in the form of slower iPhone and accessory sales, and production delays in COVID-19-affected China.
Apple’s shares are currently trading at an advanced price-earnings ratio of 22, which is roughly a 21% discount from its historical average. At 16 times ahead of corporate value according to EBITDA, Apple’s stock is trading at a 17% cut from its historical norm.
The more persuasive assessment of the powerful Apple caught the attention of Jim Suva, a longtime technology analyst at Citi.
“We believe that demand for Apple’s products and services will remain resilient through fiscal 23. We recognize that legal risks remain a significant excess on the stock, but we view them as headline risk rather than underlying risk. Headlines like this are a close Suva, a customer-facing 20-year risk. “The futures stock withdrawal, which we will see as a buying opportunity for Apple stock,” wrote in a new one-page report.
Suva reiterated its buy rating at Apple with a price target of $175, which assumes an increase of about 30% from current levels.
“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 foldable headsets in 2024,” said Suva.
Here are six factors behind Suva’s optimistic 2023 call to Apple.
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Here comes India: Suva says a somewhat appreciated factor in Apple’s future growth is India. Suva says the biggest growth factor in India is the growing wealth of the country’s population. “India’s upper-middle and high-income middle class with incomes of more than $8.5k doubling to more than 51% (~200 million) of total households, while currently representing 25% of households These households are expected to increase. Spending has increased six-fold to 61% of $6 trillion, representing 37% ($1.5 trillion) of current spending by 2030. Suva is committed to helping consumers transition to premium offerings or new consumption. “Increased spending of approximately $2 trillion on affordable, mid-priced offerings, in line with the $2 trillion increased spend due to the addition of categories.”
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Increase in iPhone sales: Suva says sentiment on iPhone demand is too low. “Investor sentiment across consumer technology hardware is very bleak, with many believing that the overall strong growth in iPhones over the past two years (+23% revenue CAGR) will see sharp declines in the future as macro-inflationary pressures continue. We don’t believe this is the case, in other words, we do not expect a repeat of fiscal 2016 or 2019, where revenues fell ~10-15%,” Suva writes. The analyst reveals several reasons for his more optimistic view. “In our view, the installed base of Apple’s iOS ecosystem is currently significantly larger, which translates to 1 billion plus iPhone users. Additionally, our research does not show that smartphone replacement rates (compared to recent levels) have extended and remained stable. in some cases it gets shorter overall,” adds Suva.
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Increase in service sales: Suva’s research shows that Apple’s service sales growth slowed in 2022, in part due to the slowing economy. However, this may change in 2023. “We expect the price increases implemented in the last quarter to be effective in the following quarters and drive revenue growth forward,” says Suva regarding the services sector.
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Those new products: “We expect Apple to launch an AR/VR headset in 2023,” says Suva. The analyst cites improvements in 5G connectivity and a competing offering from Meta’s Oculus as key reasons for Apple’s finally hitting the market. Suva thinks that any product announcement in this direction can raise the stock.
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Regulatory risk is exaggerated: Recent reports claim that Apple may allow alternative app stores on its iPhones and iPads to comply with Europe’s Digital Markets Act. Suva believes that Apple’s influence on the dominant app store business is overstated. Suva says: “There are several factors that could limit the impact of these non-store billing options, including consumer behavior, which in our view tends to be sticky, particularly as it relates to the ability to securely pay for and manage their subscriptions,” says Suva.
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Cash gifts: Suva thinks Apple is ready to drop the mic as it returns cash to investors next year. “With ~$110 billion per year plus free cash flow and $49 billion in net cash (as of FY22), we expect Apple’s cash chest to support at least $110 billion per year plus 4-5% shareholder returns by spring 2023. We expect Apple to announce a $85 billion share buyback after distributing ~$90 billion in fiscal 2022. We also expect the company to increase its dividend by 10%, Suva writes.
Brian Sozzi He is a great editor and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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