Missed Opportunity or Prime for Growth?

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+4.30 (+1.88%)

(As of 07/10/2024 05:36 PM ET)

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With the rush to invest in AI stocks, Apple Inc. NASDAQ: AAPL remains a powerful contender with significant growth potential. Apple stock is Warren Buffett’s largest holding, even after a 12.8% trim in the past quarter. The reduction was likely made with the intention to invest in other promising companies rather than indicating a change in Buffett’s sentiment. Investors often focus on artificial intelligence stocks like NVIDIA Co. NASDAQ: NVDA, pushing its valuation to $3.3 trillion, while sometimes overlooking Apple’s enduring strength. 

Apple boasts one of the strongest brand moats globally, now considered social currency. This brand strength and innovative edge position Apple for continued growth. One analyst on Wall Street is willing to bet his career on publishing his view, which could see Apple becoming a $4 trillion company. As market dynamics shift, it’s crucial for investors to recognize Apple’s value and potential in the evolving landscape. 

Apple’s Global Dominance: Still Going Strong

The United States faces rising geopolitical tensions against China, particularly regarding technological advancements and semiconductor equipment. Embargoes and repercussions have dominated the arena during 2024, and not even Apple was safe from this chip war.

Chinese firms attempted to ban iPhone usage by their employees. Chinese officials followed suit in their views on government employees. While that caused a steep selloff in Apple stock during 2023, shedding off as much as $200 billion in market capitalization, an unlikely player stepped into Apple’s defense.

Microsoft Co. NASDAQ: MSFT recently issued a memo to its employees in China. To their surprise, these employees were expected to keep their iPhone usage, rather than Androids or even China’s very own Huawei. The reasoning behind these demands is wrapped in cybersecurity.

Microsoft thinks that by using Apple devices when logging in and working inside the firm, employees won’t be subject to hackers and other intellectual property leak risks. This shows investors that not even the biggest perceived risk, China, can put a cap on Apple’s potential upside.

There are two ways investors can break down the potential path in Apple stock. The first is taking Buffett’s view of only considering Apple’s financials and its current return on capital as a gauge, and the other way is to look at Apple from the opposite end, as a technological play.

Two End Analysis Concludes One Thing: Apple Stock Is Going Higher

From the fundamental view, investors should focus on one beginning metric to set the benchmark. Over 50% in return on invested capital (ROIC) rates will be the main driver in compounding an investment into Apple stock, as annual stock price performance tends to match the long-term ROIC through a business cycle.

So, what drives ROIC at Apple? A gross margin of 45.6% gives way to a 26.3% net margin, leaving enough room for management to reinvest capital at these desirable rates. Investors should remember that as Apple becomes a bigger software-as-a-service (SAAS) player, its margins will expand aggressively.

It is more common to experience an Apple sales representative attempting to pitch customers on subscription programs and other pre-packaged software services. Some of these include streaming and entertainment, Apple Care (insurance), iCloud storage (which has become a commodity these days), and much more.

That leads investors into the technological side of things, where a Wedbush analyst quoted the new iPhone 16 and its artificial intelligence capabilities to act as a major catalyst. Investors burned on product release disappointments before may be wary of this pitch, but this time, it’s different.

Why? Apple recently announced a partnership with OpenAI, one of Elon Musk’s latest ventures into the space. This new access to leading artificial intelligence will be integrated into the new iPhone and all other Apple devices.

Analysts and Shareholders Show Confidence in Apple’s Future

Overall MarketRank™
4.58 out of 5

Analyst Rating
Moderate Buy

6.2% Downside

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0.44mentions of Apple in the last 14 days

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It looks like Apple will do more than upgrade the camera this time around, leading other analysts to publish their own views. Those at Needham & Company boosted their price targets on Apple stock to $260 a share, up from $220 a share, daring the stock to rally by 12.5% from where it trades today.

More than that, DNB Asset Management (one of Apple’s largest shareholders) recently boosted its stake by 16.7% as of July 2024. This increase would bring the asset manager’s investment up to $894 million today, a vote of confidence in that $4 trillion goalpost.

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