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I told a friend a few months ago that Apple (AAPL) looked like an attractive purchase somewhere in November when it was hovering around $157 per share. Told him my bull case for AAPL and basically convinced myself into buying the stock. Perhaps not convincing enough, because I sat on it and procrastinated while it reached new highs over the December period.
Thankfully, the markets dipped last week and I managed to get in at around $164 and $160 before earnings came out. Apple’s Q1 2022 quarter beat nearly every expectation and the stock is now trading comfortably above $170. I will continue to increase my position in this stock as I’m convinced that Apple will do well in the next three to five years at least.
Apple’s strong core offering of products
Apple is of course the iPhone company, and the iPhone is doing well. It’s doing great in Europe and China, and just about anywhere in the world. All this without even doing radical things like release a folding smartphone, a form factor that its competitors have been trying to make relevant and beat Apple to the game. But consumers don’t care about first; they care about quality and brand, and Apple definitely has both. If and when Apple does make a folding phone, you can bet your last dollar that it would sell very well.
Even outside of the iPhone, other product categories like Apple Watch, AirPods, Macs etc. are hitting new highs. Apple’s wearables are increasingly popular: Apple Watch and AirPods are relatively young products that are growing annually, and have a lot of room for future iterations and further growth. Macs have just received a major and significant boost from Apple’s custom silicon that Intel is struggling to even match. The iPad did hit a snag, however, with Apple citing chip shortages.
With the increasing active user base, services revenue is growing more and more profitable, representing a healthy stream of recurring revenue. For perspective, Apple’s iPhone revenues are gigantic, and their services revenue is now more than a quarter of their iPhone revenue.
Even without releasing new categories, I think Apple’s business remains healthy as long as they continually improve their existing products year on year, and they do.
Apple’s product philosophy
Apple’s philosophy towards product design has been very consistent and apparent to those who have been watching the company for a while. The company’s greatest strength is not in releasing a revolutionary product that sucks up all the oxygen in the room leaving its competitors dead overnight. Instead, they usually enter new product categories with a first generation product that ostensibly seems lacklustre in certain regards, but you can be sure it is something that they would relentlessly polish, improve, and make better with each passing year and subsequent generation. This is described in an article titled “This is how Apple rolls” by esteemed Apple analyst John Gruber, and the 12-year-old article is still remarkably accurate today.
Look at the first generation iPhone and all its glaring omissions: no MMS, no cut copy paste, no ability to install apps among other missing features. It didn’t even have 3G in a time where every other phone was on the new network technology. The iPhone today is a different beast, a culmination of consistent yearly improvements and refinements. The same story can be told of just about any product Apple releases: scoffed at initially, then sells in the millions as it becomes more and more compelling.
Apple’s upcoming product: AR goggles
It is with this philosophy that we await Apple’s upcoming AR goggles, and the rumours have been too strong for this to not exist. An Apple-branded AR goggles will be very interesting to watch as as it joins Apple’s AirPods and Watch in an increasingly wearable future of computing, and who better than to lead the industry forward in wearables than Apple? It is a highly fashionable company with a unique strength of making things that people actually want to be seen with.
Tim Cook has mentioned on occasion that Apple’s entire product line-up could be placed on a table, which is very telling: Apple releases new product categories with the goal to sell millions and millions of a particular thing. We now live in a world where hotcakes wished they sold like Apple products, and Apple will sell many millions of their new product.
Apple’s potential product: Electric Vehicle
We can’t speak of Apple rumours and upcoming products without mentioning the fabled Apple Car, and every sign points to Apple making their own electric vehicle. EV companies get crazy valuations by virtue of being in the EV space, so just imagine what would happen to Apple stock if they formally announce their EV product.
We also can’t speak of electric cars without bringing in Tesla (unless you’re Joe Biden), so here are a few reasons why I think Apple can hold its own against the reigning EV champion:
Apple is easily one of the most valuable brands in the world commanding immense brand loyalty. Coupled with Apple’s famously cohesive ecosystem, I know which option I’d put my money on if an iPhone user faces the choice between an Apple vehicle and a Tesla. Apple’s brand value is enormous and it’s telling when reviewers of Tesla vehicles tend to liken it to “driving an iPhone”.
Moreover, Apple has invested years and extensive resources into technologies like processors, machine learning, batteries etc. which it can bring to the EV space that other smaller competitors may not have been able to bring against Tesla. Let’s not forget Apple’s massive financial resources and its ability to take over an EV company or two to jumpstart their EV ambitions.
With more than 500 stores worldwide, Apple also has a very strong distribution presence to showcase and sell its car. Apple is an aspirational brand and its stores reflect that – imagine the kind of allure it can garner for its vehicle showcased in the ridiculously grand Apple at Marina Bay Sands store.
Apple’s track record
Tesla die-hards would no doubt dispute my theory that Apple could match or even displace Tesla as the king of EVs, but consider what Blackberry, Swatch, and Intel thought of Apple when it entered their respective domains. “PC guys aren’t going to figure it out” and “Apple Watch is a toy” are going to be quoted till eternity as reminders of companies who underestimated Apple and lost.
Now, perhaps the Tesla bulls are right and Tesla has incredible moats that Apple cannot overcome. Even in such a scenario, Apple has demonstrated multiple times that it doesn’t need to monopolise a market to reap impressive profits quarter after quarter. I can’t see a world where every single car on the road belongs to a single brand, and Apple can be yet another brand in the car industry and still be in an incredibly enviable position.
In all, I feel very comfortable with the risk-return profile of Apple. It is a stable company with a strong core business, and its ability to further expand into new categories give it growth potential despite its already massive size. Apple has many other categories to fit into their increasingly crowded table of products, and as both an investor and consumer, it’s exciting to see what comes next.
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