Apple's Market Position: Buffett's Sell-Off, AI Potential, and Future Growth

Apple: Unsaturated Market, Improving Business Quality and AI-Growth Catalysts

I briefly mentioned my bullish stance on Apple (NASDAQ:AAPL) a couple of months ago in my last article on Berkshire Hathaway (BRK.B). In this initiating coverage of Apple, I will share my bullish thesis: This also marks the highest services mix over a longer time period of more than 4 years. I expect this mix shift trend to continue in an accelerated fashion driven mainly by 3 factors: 1. Increase in the installed base of products I think there is still plenty of room for increased market penetration of Apple products, particularly in the underpenetrated emerging markets as the population grows wealthier, thus increasing uptake of Apple's premium products. Indeed, that is what we are seeing gradually in India: Apple's iPhones are seeing a broad increasing market share trend in China as well: In the latest Q3 FY24 earnings call, management highlighted that many of the customers in mainland China are first time users: And so if you look at this on the Mac and iPad, in Mainland China, the majority of customers buying or buying for the first time, buying that product for the first time and the watch, the vast, vast majority of people are buying a product for the first time. - CEO Timothy Cook in the Q3 FY24 earnings call Overall, I believe the market for Apple's suite of products is still very much unsaturated, with plenty of opportunities for increased market penetration. 2. Customer loyalty to the Apple ecosystem Apple has a very low customer churn of 9%. Customers' loyalty to Apple is very strong, even cult-like. For example, some studies have shown that iPhone users are 21 times less likely to switch brands compared to Samsung users. This increases the customer lifetime span for Apple users to continue being a customer of Apple Services. 3. Pricing growth I anticipate accelerated pricing growth in Apple's services as well with the infusion of Apple Intelligence (discussed in the next section below). I anticipate these factors to result in further increases in Services gross margins. I believe Apple will soon have Services gross margins at higher levels than Products gross margins within 3 years: Note that Services revenues are a more predictable, less lumpy and faster-cycle (due to lower working capital requirements) stream of cash flows. Hence, overall, I anticipate this along with an anticipated increase in the margin profile of Apple's business to result in a superior quality of business, making a valid case for structural multiple expansion in the stock. The infusion of Apple Intelligence features into the product suite will enable users to have a powerful AI assistant on their devices, marking a step-up evolution beyond Siri's virtual assistant era. Apple is set to introduce its iPhone 16 series on September 9 2024 in its 'It's Glowtime' Launch. This model will include Apple Intelligence AI features that management intends to roll out gradually in a staggered manner over the course of a year. I believe the staggered release is a smart move as it allows the company to benefit from a natural refresh of marketing hype cycles on social media. I think it is reasonable to assume that people talking about new features every few months in a staggered release program would lead to more marketing engagement than in a single-point full feature release program. Furthermore, I think Apple's partnership with OpenAI places it in good stead to monetize from distribution of AI services provided by companies that take on the burden of capex investments. This helps Apple benefit from consumer AI adoption in an asset light way. I view this favorably as asset-light businesses tend to generate superior returns. Apple currently trades at 1-yr fwd PE of 31.5x, which corresponds to 26% premium over the longer term average of 25.0x. I believe this premium is deserved due to the improved business quality of the company (discussed in the earlier section). Hence, I am comfortable in having a bullish slant at these valuations. If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post, which explains how and why I read the charts the way I do. All my charts reflect total shareholder return as they are adjusted for dividends/distributions. On the relative technicals vs the S&P500 (SPY) (SPX), there is an overall uptrend with some space left to go till the monthly resistance level is hit. Hence, I think there is further scope for outperformance ahead for AAPL stock. Looking closely at the iPhone 12-15 Series adoption curves, I noticed that for the latest 2 models (iPhone 14 and iPhone 15), customers' have shown greater enthusiasm for the Mini models, which is the lowest-end model. This is a big change from what was seen in the iPhone 12 and iPhone 13 Series' adoption curves, for which the Mini models saw the weakest adoption rates. From a timing perspective, the consumer preference shift to the Mini models started 2 years ago since that is when the iPhone 14 was launched. Incidentally, the University of Michigan Consumer Sentiment Index figures show weak consumer sentiment 2 years ago to slightly improved but still low figures vs the broader history in the last decade: Based on a still-weak consumer, I believe historical consumer preference trends toward the lower-end Mini models may continue. And if this happens, I suspect there would be a relatively lower willingness of consumers to spend on model upgrades, which may not bode well for the iPhone 16 launch. This is a key risk I am monitoring. I think Apple has plenty of opportunities to further penetrate an unsaturated global market for its products. This will increase its installed base and when combined with its characteristic high customer loyalty and retention, and pricing levers from the infusion of Apple Intelligence AI features, I believe there is a strong case for a mix shift and gross margin expansion in the Services revenue category. This revenue stream is more predictable, less lumpy and with better cash flow conversion. Hence, the quality of the business is likely to improve, thus making Apple deserving of a more premium multiple than its longer term average valuation levels. I think a staggered launch of Apple Intelligence AI assistant features is a smart way to increase engagement with the target market, thus increasing the chances to maximize sales of new products launched next month. Also, partnerships with firms such as Open AI will open up new AI monetization routes for the Services business without the burdens of relying on own capex expenditure. Recent trends in iPhone adoption rates suggest a preference for the lower-end Mini models during a time when the consumer sentiment index has been near decadal lows. I am monitoring to see if this trend continues for the iPhone 16 Series model as that may also indicate consumers' lower willingness to spend on model upgrades. Rating: 'Buy' Strong Buy: Expect the company to outperform the S&P500 on a total shareholder return basis, with higher than usual confidence. I also have a net long position in the security in my personal portfolio. Buy: Expect the company to outperform the S&P500 on a total shareholder return basis Neutral/hold: Expect the company to perform in-line with the S&P500 on a total shareholder return basis Sell: Expect the company to underperform the S&P500 on a total shareholder return basis Strong Sell: Expect the company to underperform the S&P500 on a total shareholder return basis, with higher than usual confidence The typical time-horizon for my views is multiple quarters to around a year. It is not set in stone. However, I will share updates on my changes in stance in a pinned comment to this article and may also publish a new article discussing the reasons for the change in view.

Apple: Warren Buffett Sells, But Is It Going Higher (AAPL)

Apple's strategic innovations and market shifts position it well for future growth, making it a compelling investment despite recent stock movements. It is said that in 1944, Warren Buffett submitted his first tax return deducting $35 for the use of his bicycle and watch while doing the paper round as a teenager. Born savvy, one could say. The world's most famous investor recently sold half of Berkshire Hathaway's holding in Apple and as this stock may look to go higher, there is general puzzlement among the financial world. Does Mr. Buffett know something we don't, is he freeing up cash to diversify Berkshire's portfolio, only he will know that. Readers who follow my analysis will be aware that I issued a buy signal for Apple (NASDAQ:AAPL) in March of last year at $160 and the reality is, compared to some of the top 10 major US equities for example, it has been a slow mover. A snapshot technical summary before we cover this element in more detail later, Apple created a pattern to $275 by the break of $200 on the monthly chart according to my analysis in late 2023 before retreating and struggling to re break resistance in an indecisive pattern until May of this year finally saw a rejuvenated bullish buy up. Apple, among the elite of elite that carry dominance in their sector, in this article we will look into the company going forward as well as analyzing the charts to examine where this equity may be looking to go next price wise as the stock market emperor partially sells out while the share price may look to go higher. Berkshire's decision to sell half its stake in Apple comes with curious timing, the company is due to release their latest iPhone to their line-up on September the 9th. The iPhone 16 will be the first smartphone in Apple's inventory that will feature AI. Also, interestingly, Apple has looked to move away from using Qualcomm's chips which they have used for over ten years into using their own organic chip modems in a bid to become more efficient and self-dependable as the AI evolution takes shape. However, this move has not come without complications, Apple has been working on manufacturing its own 5G chip since 2018. It could be that the company underestimated the complexity of its move into organic manufacturing of these key components. Last year, Apple extended their contract to use Qualcomm's chips until 2027. The key will be a delicate balance of ensuring their own manufactured modems will power AI features sufficiently, while choosing to activate an option with Qualcomm for a further several years while continuing their in-house development. With these types of efficiency and market evolving shifts being made by the tech giant to be self-sufficient as AI integrates through their products in the future, continued strong sales and a large cash balance. Can we perhaps observe it is the latter of the reasons that Berkshire has decided to partially sell, free up some cash and diversify their portfolio? Let's move onwards to the charts to technically prospect where Apple may look to go next price wise. We can see on the monthly chart below the initiation of the wave one from $125-200. Remarkably given the overall upward trajectory of the whole market, this wave started in December 2022 and contained six straight months of bullish buying eventually pausing at the $200 area to create the wave two rejections which saw the price fall off that high to settle around $165 before picking up momentum towards resistance once again. On a technical note, Apple did pip higher very slightly technically launching a third wave to $275 only to retreat back into its structure again, even piping lower from the wave two only to find traction again to re attempt for resistance that was broken through, before Apple pierced $240 so far in this third wave structure. Sometimes financial markets can take this course, by that I mean pip through support or resistance slightly before quickly turning around in the other direction. Personally, like all my analysis when reading three wave patterns lending probability as to the future price of a financial market, I like to see tangible timeframes create three wave patterns above or below resistance to indicate that the market will actually take this course and not just pip below or above resistance. An example below is from the Apple break of $200 on the daily chart, we can see bullish buying candles above the $200 region along with bearish selling candles that then get broken above launching a third wave on the daily that has so far bounced of the Fibonacci 161 exactly and is due to complete circa $247 (On this daily timeframe), overall, we are looking at the monthly chart in this article, I would just like to give our readers and example from timeframes within the monthly that also give different targets within the macro picture. The upcoming launch of the iPhone 16 that will see full AI integration is an exciting moment for this tech giant. The charts suggest no immediate bearish case for this equity. It would not surprise me if we saw another month selling on the way to $275 if Apple is going to get there. Overall, I would expect Apple to arrive at this target within 180-240 days.