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Apple Stock: Innovation Key to Sustaining Brand Power
Stock Analysis & Ideas

Apple Stock: Innovation Key to Sustaining Brand Power

I am bullish on Apple (AAPL) stock due to its significant competitive advantages, fortress balance sheet, and reasonable valuation.

Apple is a leading consumer technology company that is known primarily for its computers and smartphones, though it also sells products and services, like smart watches and music streaming.

The company generates over 40% of its revenue from North America, with international sales making up the remainder. (See AAPL stock charts on TipRanks)

Strengths

A strong brand name, and sleek product designs are what make Apple such a valuable company.

These allow Apple to charge high prices for its products, while still maintaining an incredibly loyal customer base, which means huge profit margins on sales.

Recent Results

On July 27, Apple reported a very strong fiscal third quarter, with double-digit revenue growth across all of its product and service categories. iPhone revenue surged 49.8% year-over-year, largely driven by the new 5G iPhone 12 family of products, leading to an overall revenue increase of 36% year-over-year.

iPad revenue grew by a solid 11.9%, Mac computer revenue was higher by 16.3%, Services saw robust 32.9% year-over-year growth, and Wearables, Home, and Accessories saw impressive 36% year-over-year growth.

Apple’s services network is stronger than ever, now boasting a paying subscriber base of over 700 million. Furthermore, sales in China grew 58% year-over-year, thanks to the popularity of the 5G iPhone.

Valuation Metrics

Apple’s valuation is not particularly cheap, but also not expensive, especially when you consider the company’s incredibly strong balance sheet, profitability, and brand power. The price to normalized forward earnings ratio is 28.5, and the price to free cash flow is 31.9.

Meanwhile, analysts expect the company to grow revenue by a robust 33.2% this year, which will then slow to 3.4% in 2022. Normalized earnings per share are expected to surge by 69.8% in 2021, before an anemic 1.2% growth in 2022. Combining the two years, however, leaves a pretty solid growth rate compared to the current valuation.

Wall Street’s Take

From Wall Street analysts, AAPL earns a Strong Buy analyst consensus, based on 17 Buy ratings, six Hold ratings, and zero Sell ratings in the past three months. Additionally, the average AAPL price target of $166.18 puts the upside potential at 7.7%.

Summary and Conclusions

Apple’s long-term prospects depend on the company’s ability to continue innovating effectively in order to maintain its competitive advantage in the consumer technology space.

If it fails to do that, then its massive profit margins will be at risk, as Apple will then have to compete on price, instead of relying on its powerful brand image to drive sales.

That said, given its world-class army of employees, and vast financial resources, Apple should be able to sustain its brand power for the foreseeable future.

With Wall Street analysts overwhelmingly endorsing the stock, and the valuation metrics at reasonable levels, Apple looks like it could be an attractive investment here.

Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.

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