The two-trillion-dollar firm is going to disrupt the electric vehicle industry and the stock has skyrocketed recently but is Apple a buy?
A few months after Apple (NASDAQ: AAPL) launched the iPhone in 2007, I found myself shopping for a phone with web-browsing capability, and none that I inspected matched the iPhone’s intuitive ease of use. It just did what it was supposed to do. That is Apple’s power — it delivers exactly as advertised, and that is why it has such a rabidly loyal customer base.
Back in January 2021, Apple confirmed that there are over one billion active iPhones in Apple’s iOS ecosystem and over 1.65 billion Apple devices in use, which all contribute to its ecosystem through at least one of the company’s highly profitable services. As a hardware virtuoso, will Apple’s foray into electric vehicles (EV) be successful, and is it a buy right now?
The bull case for Apple
Apple is knocking it out of the park in both its Products and Services divisions as it recorded its highest revenue ever for the second quarter of nearly $89.6 billion, up 54% year-over-year. Apple hosted an event back in April and showcased its AirTags, new iMac models, an updated Apple TV 4K, and new versions of the 11 and 12.9-inch iPad Pro.
Now, Apple is looking to partner with an auto manufacturer to develop EVs, specifically, autonomous vehicles, wherein a passenger would only need to specify a destination and the car does the rest. The company is more than halfway there as it has the necessary software, processing hardware, and AI for such a vehicle. Additionally, Apple generated $24 billion in operating cash flow in Q2 meaning the firm certainly has the wherewithal for such an ambitious endeavor. As with all of its products, there is little doubt that its vehicles will be insanely popular and that’s a plus as the autonomous vehicle market is projected to exceed $200 billion in value by 2025.
Apple Services has been on a roll as well, reporting its highest revenue ever of over $16.9 billion in Q2 2021. Apple TV+, its over-the-top (OTT) service is up to 40 million subscribers and will attract more by being one of the lowest-priced services. The company’s App Store takes a 30% cut in sales for all apps that it hosts, and that includes subscriptions to outside services, like Netflix or Spotify, so I would imagine it’s a significant revenue generator.
The bear case for Apple
One potential problem Apple might face is a reduction in the commission it charges on its App Store as a lower app tax would obviously affect revenues. Aside from this concern, analysts feel that Apple’s trading multiple has gone up faster than its revenue and net income on expectations of robust future growth.
Further, although its EPS has grown nearly 50% in the last five years, it was mostly fueled by share repurchases. There is also a mismatch between iPhone sales and the company’s user base that indicates that people are purchasing lower-priced models and will probably not be inclined to purchase pricey accessories or subscribe to services. Finally, Apple’s net income margin has been in decline, reaching its lowest point in five years at 20.9% in 2020.
So, should I invest in Apple?
Absolutely, this is a no-brainer. Apple designs hardware that people not only need but love and to offset the lower margins of their hardware sales, it has its Services division, which is a source of steady subscription revenue. Apple’s reach is so wide that a minor change to its iOS can impact ad revenue for companies like Facebook. That tells me that this company is massive with its roots firmly planted in our society.
1. Who is the CEO of Apple?
Tim Cook, as of August 24, 2011.
2. Does Apple pay a dividend?
Yes, $0.22 quarterly (or $0.82 annually).
3. Is Berkshire Hathaway invested in Apple?
Yes, Warren Buffett’s company owns 887 million Apple shares, more than 40% of his entire portfolio, valued at over $108 billion.
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