Bulls v Bears: Should You Buy Apple Shares?

Morningstar analyst Abhinav Davuluri sums up the pros and cons of the iPhone maker, which is rapidly approaching a $3 trillion valuation

Abhinav Davuluri 9 December, 2021 | 10:12AM
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Apple iPhone

Shares in Apple are up 35% so far this year, another impressive performance after a gain of 70% in 2020. This means the company is getting close to being the first to reach a $3 trillion valuation. Does that mean the iPhone maker is a buy?

Morningstar analyst Abhinav Davuluri looks at the pros and cons:

Apple’s (AAPL) competitive advantage stems from the ability to package hardware, software, services, and third-party applications into sleek, intuitive, and appealing devices. This expertise enables the company to capture a premium on its hardware, unlike most of its peers. Despite Apple’s admirable reputation, loyal customer base, and unique products, the consumer hardware space can be unforgiving to companies unable to consistently satiate customers’ appetite for more features. Given the short product cycles of Apple’s offerings and the army of companies targeting its dominance, we do not believe Apple has a wide economic moat.

Switching costs and intangible assets support Apple’s narrow moat. The company enjoys stellar returns on its devices by offering a unique user experience with its iOS ecosystem. Contrary to its peers in PCs and smartphones that rely on open operating systems – Windows and Android, respectively – Apple’s walled garden approach for its popular iOS allows it to charge a premium for relatively commodified hardware not too different from that sold by Samsung, Dell, HP, and others. Customer switching costs are elevated for Apple users because a non-Apple iOS experience does not exist, unlike computing platforms for the Windows or Android ecosystems that boast PCs and smartphones from a multitude of companies.

Bulls Say

  • Between greater smartphone penetration in emerging markets and repeat sales to current customers, Apple has plenty of opportunity to reap the rewards of its iPhone business.
  • Apple’s iPhone and iOS operating system have consistently been rated at the head of the pack in terms of customer loyalty, engagement, and security. This bodes well for long-term customer retention.
  • We think Apple is still innovating with the introductions of Apple Pay, Apple Watch, Apple TV, and AirPods. Each of these could drive incremental revenue and, more crucially, help to retain iPhone users over time.

Bears Say

  • Apple’s decision to maintain a premium pricing strategy may help fend off gross margin compression but could limit unit sales growth, as devices may be unaffordable for many customers.
  • If Apple were to ever launch a buggy software update or subpar service, it could diminish the company’s reputation for building products that “just work.”
  • Apple is believed to be behind companies like Google and Amazon in artificial intelligence development (notably Siri voice recognition). This could be problematic as tech companies look to integrate AI in order to deliver premium services to customers.

We view the iPhone as a revolutionary product that created the smartphone ecosystem and transitioned computing habits away from the PC. The robust app store helped foster iPhone adoption and expand Apple’s user base, with applications for productivity, social media, gaming, music, and so on. We foresee Apple’s ongoing business coming from existing customers versus new smartphone adopters. With hardware becoming increasingly commodified and replacement cycles potentially elongating in the long term, we expect Apple to focus on newer software and services to augment the user experience and retain customers. Its additional products and services (like Apple Watch, iCloud, Apple TV+, AirPods, and Apple Pay) act as both supplemental revenue opportunities and, more important, critical enhancements to the iOS ecosystem that support Apple’s crown jewel: the iPhone.

Key Proprietary Morningstar Metrics

Fair Value Estimate: $124 (current price $175)
Star Rating: 2 Stars
Economic Moat Rating: Narrow
Moat Trend Rating: Stable

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Abhinav Davuluri  is a Senior Equity Analyst for Morningstar