The next chapter in the Apple investment case
Every 5-10 years the Apple investment thesis changes. Twenty years ago it was a hardware product company that launched into new markets with the iPod, iPhone, and iPad. Ten years ago it was the start of recurring revenue with Services. While services added visibility to earnings, the hardware segment was still a nagging concern for investors given the hard lessons of the past when must-have consumer device companies broke, notably Sony, Nokia, and Blackberry.
I believe we are entering a new chapter in how investors view Apple. Over the next five years, I expect investors will increasingly see Apple as a can’t live without consumer staples company. The best evidence that this investor shift is happening was the December 2022 quarter when Apple missed expectations. Not only did they miss, but they missed the miss given in November analysts cut their estimates when Apple warned of a shortfall due to iPhone production shutdowns in China. Since then shares of AAPL are up ~12% vs. the Nasdaq which is flat. I believe the reason for the strength of the stock is investor optimism around the active device number which reached 2B in December, up 8% y/y and doubling over the past seven years. It’s hard to grow a number that big that fast. Just ask Meta which grew its DAUs in March of this year by 4%, to just over 2B. Investors can see the Apple flywheel is alive and well, following a 20-year success story in which consumers buy one Apple product, fall in love, buy another product, add a service, upgrade, and repeat.
Apple updates its active installed base about once a year, which means we may have to wait nine months for the next data point. In the meantime investors will likely be increasing their focus on the metric given if it keeps growing, investors can sleep well at night.
I believe Apple should trade at a premium to other consumer staples given it has both earnings stability along with optionality to accelerate revenue growth. Coke, Clorox, and P&G currently trade at 26x 2024 EPS. AAPL trades at 24x with the optionality to reaccelerate revenue around wearables, health, financial products, and auto along with adding AI to the fabric of all of its products. Some of that is already baked into estimates, with consumer staples companies expected to grow revenue at 1.7% y/y in 2024 compared to Apple at 7%.