Wall Street Analysts Talk Apple Car, 5G Super Cycle
As another week came to an end, Wall Street continued to offer its insights on Apple stock. From the Apple Car to the iPhone to the buy-on-weakness opportunity, analysts published several interesting reports on the Cupertino company.
- Still bullish on Apple stock
Overall, Wall Street continues to be bullish on Apple. Not much has changed since I last looked at the analyst rating and price target distribution: strong buy recommendation, target of around $148 per share. Because Apple stock has been spinning its wheels lately, the price gap to target has increased.
One of the most attention-grabbing reports came from “the bull of bulls”, Wedbush’s Dan Ives. The analyst believes that Apple stock can nearly double in the foreseeable future, as it marches to a market cap of $3 trillion.
At the center of his optimism is the iPhone. Dan thinks that the 5G super cycle will be a game changer for the Cupertino company, and an important source of upside to consensus revenue estimates.
According to Citi’s Jim Suva, the Apple Car should be a value creator for Apple investors, but he also warns about low margins. The automotive industry is known for being highly competitive, which would likely chip away at Apple’s impressive 38% gross margin delivered in fiscal 2020.
Lastly, Morgan Stanley’s Katy Huberty also weighed in. She pushed back on the idea that the alleged iPhone 12 production cuts pose a serious problem for Apple – an opinion shared by the Apple Maven.
Apple Vs. Facebook: The Battle Over Privacy Heats Up
Apple and Facebook have been fighting over users’ privacy, and the debate is heating up. Who will win this Goliath vs. Goliath battle to become the strongest gatekeeper in Big Tech?
- The battle of the gatekeepers
Both Apple and Facebook claim the moral higher ground when defending their positions in the battle over users’ privacy. Apple sees itself as the protector of information, while Facebook claims to be the force for good that uses the data in the best manner possible for its audience.
But in reality, the business motives behind the debate speak louder.
Should Apple move forward with the iOS update as planned, smartphone users could be attracted to the privacy feature, which would bode well for the iPhone itself. Should Facebook succeed at stopping or limiting the changes, the media company would benefit from its ability to offer its consumers (i.e. advertisers) a better product.
It is unclear what will happen in this Goliath vs. Goliath fight to be the strongest gatekeeper in Big Tech. Apple has proven to be somewhat accommodative in other battles, when it lowered its App Store commission to smaller developers, in the face of antitrust scrutiny. This time, Cook & Co. seem more adamant.
It is also unclear whether Facebook can summon enough support from other tech companies and/or even regulatory agencies to strengthen its case. At stake could be a 7% hit to Facebook’s revenues, which would amount to a hefty $6 billion per year.
App Store Drama: Good News For Apple’s Services Segment
Scrutiny from Epic Games led Apple to lower its App Store commission charged from smaller developers. But in the end, the impact to financial results may be too little for Apple investors to care.
- App Store: doing some math
My estimate of the App Store’s contribution to Apple’s total revenues is a bit more conservative than Sensor Tower’s total fee number suggests: about 6%, or roughly one-third of service segment revenues.
Should Sensor Tower be right about the impact of the commission discount, we are looking at a total company top-line hit of less than 0.2% going forward, per my calculations and assuming no change to the policy. For reference, Apple’s revenues grew 5.5% during the pandemic year, in total.
Beyond revenues, lowering developer commissions could be felt most in the bottom line. Since I believe that the App Store has just about the best margin
profile in Apple’s product and service portfolio, the hit to revenues could trickle straight down to margins.
- What this means to Apple investors
In the end, I maintain my opinion about Apple shares, as outlined in my roadmap, on March 16:
- At the current price of $125 per share, Apple is probably a stock to hold over a multi-year period, due to robust fundamentals and compelling growth opportunities;
- If the stock dips below $120 (it traded for as low as $116 as recently as March 8), investors may be faced with an even better investment proposition;
- If the stock climbs above $130 and towards the peak, investors could still own shares with confidence, but they may need to scale back on future return expectations.
The Federal Reserve’s Monetary Policy: What Apple Investors Should Know
On March 17, the Federal Reserve announced the decision to leave its short-term interest rate target unchanged, at near zero. At the same time, the Fed also revised its economic growth and inflation expectations higher.
- The impact to Apple’s business
Interest rates near zero can impact a company’s business in a couple of ways. For instance, Apple held nearly $200 billion in cash and equivalents on its balance sheet, as of the end of fiscal 2020. This pile of money earns minimal interest income today, given the low yields.
With interest rates staying close to zero for at least another year, Apple’s average $70 million in net interest income over the past three quarters (vs. $380 million in the previous three periods, when rates were higher) will probably remain low for a while longer.
- The impact to Apple’s stock
First, the present value of future cash flows (a traditional way of measuring a stock’s worth) is higher when rates are lower. Second, low rates mean little competition for investors’ assets, which more likely end up funneled into the stock market.
A low-rate environment is particularly bullish for growth stocks, as I believe to be the case of Apple. Worth noting, however: the Fed’s monetary policy decisions impact primarily short-term, not longer-term rates. If the 10- and 30-year yields continue to rise, as they have in the past few months (more so in 2021), the hike can be bad news for Apple shares.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)