Apple Stock: The Growth Story Goes On (NASDAQ:AAPL)

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Investment Thesis

At the time of writing, Apple Inc. (NASDAQ:AAPL) is trading at $172 per share, up 33.5% in the previous 52-week period, outpacing the 23% growth of the S&P 500 once again. The pandemic fast-tracked the global economy towards digital transformation, which reflected in Apple’s strong revenue growth throughout 2021 across all its business segments. The three primary growth drivers in this surge were iPhones, iPads, and Apple Services.

As Apple has recently hit a $3 trillion valuation mark, Investors look forward to “the next big thing” that will stretch the valuation even further. As such, Augmented Reality (NYSE:AR) has opened new doors for the tech industry and answers that question in the form of Metaverse. Apple is on its way to the Metaverse space as it plans to step into the eyewear market through the AR Glasses soon.

Alphabet Inc. (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), and Meta Platforms, Inc. (NASDAQ:FB) are some of the big names that are also gearing up to step into the Metaverse. Still, we all know that Apple’s market-disrupting innovations and loyal customer base tend to leave a prominent footprint in its markets. This article will build around Apple’s upcoming leap into the AR/VR/MR/Metaverse as “the next big thing” that will push the company’s valuations off the charts.

Apple’s journey to realize the potential of the virtual world and push the stock value upwards is expected to start in 2022, which makes me put a ‘buy’ rating on the stock with a $205 target price.

Revenue Growth Dive

Apple has shown strong YoY growth of 33% in its revenue through the previous fiscal year. The three primary growth drivers in this surge were iPhones (iPhone 13), iPads (iPad Air & Pro), and Apple Services (Ads, App Store, Cloud, etc.), which exhibited a YoY growth of 39%, 34%, and 27%, respectively. However, despite having a lower YoY growth and a smaller portion of the sales revenue than iPhone and iPad, Apple services boast almost double the gross margin at nearly 70%. It is evident that services segments now capture a larger share of total revenues. The rising trajectory will persist for the foreseeable future, pushing entire gross profit margins further up.

Apple growth by operating segment $3 trillion company

Apple’s revenue by operating segment since 2001

statista

A significant point to be noted is that the iPhone 13 launched at almost the end of the company’s fourth quarter. Therefore, the iPhone revenue figure of $38.87 billion in Q4 does not include its sales. However, iPhone 13 sales have exploded since then, with around 40 million phones sold over the holiday period, and this massive revenue stream will be reflected in the first quarter reports of 2022.

Apple Products Vs Services Gross Margin

Chart created by author using data from AAPL’s 10-K

Apple

Apple’s services category includes revenue generated from the App Store, Apple Music, Apple Arcade, Apple Pay, Apple Card, Apple TV+, Apple News+, Apple Fitness+, AppleCare+, iCloud, iTunes Store, licensing, etc. Apple has over 745 million paid subscriptions, up 160 million YoY, and five times in five years. Moreover, as shown in the chart below, the service revenue has been reaching a record-breaking level in each of the previous six quarters, signaling a promising growth potential in the service segment.

With a revenue of over $68 billion, the company is well on its way to Evercore ISI analyst projections of $100 billion Apple services revenue by 2024, accounting for 30% of total revenue and 45% of gross profit. As a result, this implies a CAGR of 21% for the services segment alone.

Apple Services Revenue per quarter

Apple Services Revenue per quarter

Apple Insider

The Massive Potential of Metaverse

At its core, Metaverse, as also analyzed in a previous article for Meta Platforms, consists of several online virtual worlds where people can have an avatar as part of their virtual presence and interact in an immersive way with other users through AR (Virtual Reality) VR accessories. Furthermore, these virtual worlds provide upgradable avatars, outfits, homes, and cars, just like the real world. So imagine attending virtual world classes, concerts, global attractions, and dream destinations with whoever you want without any physical boundaries.

The Metaverse is powered by cloud infrastructure, software tools, platforms, applications, user-generated content, and hardware. It contains user experiences including, but not limited to, entertainment, gaming, commerce, social interactions, education, and research. Bloomberg estimates that the market size for the Metaverse could reach $800 billion by 2024 with a CAGR of 13.1% from 2020, while Goldman Sachs analysts estimate that $1.35 trillion will be invested in developing these technologies in the coming years.

Metaverse Market Growth Outlook

Metaverse Market Growth Outlook

Bloomberg

Apple is silently working on AR/VR Products

The Metaverse is not something to be launched but rather something evolving over time, and we can expect Apple to enter this space once it has perfected the technology. The company’s first steps into this world seem to be materializing within 2022. It is already developing its mixed reality (MR) headset and has further collaborated with Sony to design and develop its AR glasses.

Apple is one of the best AR platform providers globally, with its ARKit and RealityKit frameworks having direct access to a customer base of hundreds of millions. Following Apple’s footprints, we can see it heading towards this untapped AR and VR market through years of strategic investments and acquisition in the AR/VR market:

No.

Company

Acquisition Year

Company Specialty

1

Spaces

2020

Conferencing Software for VR Headsets

2

NextVR

2020

Event Hosting VR tech

3

Camerai

2019

AR and Computer Vision

4

IKinema

2019

Motion Capture/Animate Video Footage

5

Akonia Holographics

2018

Lenses for AR Glasses

6

Vrvana

2017

AR/VR Headsets

7

SensoMotoric

2017

Eye Tracking

8

RealFace

2017

Facial Recognition

9

Emotient

2016

AI for facial expressions analysis

10

Flyby Media

2016

AR tech to identify and tag real-world objects

11

Faceshift

2015

Face Capture

12

Metaio

2015

AR Software

In addition to hundreds of millions in acquisitions and investments, Apple poured 6% of its sales figure into research and development ((R&D)) in 2021, amounting to a total of almost $22 billion. All these facts appear to carve a pathway to Apple’s route into the Metaverse through the AR/VR space.

Apple Capex and R&D
Data by YCharts

Apple’s first Head Mounted Display Patent

Unlike Meta, Apple does not discuss new products until they are ready for launch. However, apart from the acquisitions, the patent development history partially paints the company’s direction. For example, early in 2022, U.S. Patent and Trademark Office granted Apple a patent relating to the head-mounted display (HMD) that combines 3D virtual views of the user’s environment and augments this with virtual objects leading to the MR. The HMD MR device can take any form of a headset, helmet, goggles, or glasses and, through its sensors, can capture the user’s facial expressions, gestures, and eye movement. Thus, the granted patent enriches Apple’s expansive collection of AR/VR/MR products, and in combination with its broad product ecosystem, the company is on track to announce its following revolutionary products.

Apple has Won a Patent for a Mixed Reality HMD that includes a Projector Mechanism that provides 3D Virtual Views

Patent for a Mixed Reality HMD that includes a Projector Mechanism that provides 3D Virtual Views

patently Apple

Valuation

Being the highest valued company globally, Apple’s stock is under constant scrutiny, making it unlikely to be significantly unfairly valued. However, using a DCF model with an achievable growth rate of 20% along with a discount rate of 8.8% and a conservative perpetual growth rate of 2% estimates a target price of almost $205 for the AAPL stock and uncovers an upside of 19%. Moreover, considering Apple’s growing services segment, entry into the Metaverse, and upcoming AR/VR/MR products, the company will likely achieve this target within the coming few months.

Apple AAPL Valuation DCF

Apple AAPL Valuation

Chart created by the author with data from Guru Focus Premium.

Conclusion

In all its years of operation, Apple has been a veteran of superior investor returns for over a decade, and despite reaching a record valuation of over $3 trillion, it still has a lot to offer. Impressive profitability metrics along with solid growth and heavy R&D investment are hallmarks of successful, forward-looking companies.

After shedding off the downturn caused by the pandemic and gaining stability, Apple is gearing up again to disrupt the industry by expanding into the AR/VR/MR and Metaverse and further expanding the Apple Services revenue streams. The company’s strong fundamentals perfectly complement its long-term objectives, making it well deserved for the valuation titles that it carries.

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