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It's been a forgettable August for shares of Apple (AAPL) , which got hit with a very swift correction after earnings. Though the company reported solid fiscal third-quarter results, the bar was set pretty high, as is expected from a company that soared to a new high going into a big reveal.
Amid the slip off its highs, various Wall Street analysts have stepped forward with some pretty positive things to say about the iPhone maker ahead of its big September keynote. Despite this, the stock has struggled to sustain a rebound. In Thursday's turbulent session, AAPL shed 2.62%, erasing most of Wednesday's gains.
Now, all eyes are on the U.S. Federal Reserve, with Powell's Jackson Hole address taking place today. Technology stocks have been caught up in the chaos as the Fed raised rates to multi-decade highs to curb hot inflation.
But even if rates steadily creep higher, it's hard to keep profoundly profitable mega-cap technology names like Apple in the penalty box for too long a duration.
Justifying Apple Stock's Premium Multiple
The first-half rally in Big Tech may have set off red flags for some. And though 29.6 times trailing price-to-earnings (P/E) may be on the expensive side for Apple, I do think the skeptics will quickly realize that Apple is worth every penny of its premium price tag.
Notably, the rise of Apple's services business has contributed to a lot of multiple expansion over the years. The latest quarter was yet another period of impressive growth in services. Still, investors seem to be over the services story. While I do think Apple has more room to run here as it looks for new ways to improve the lives of its many users, it's clear that the bar is set high - so Apple needs to work some of its innovative magic to propel the share price even higher.
Indeed, it's time for the "E" in P/E to catch up to the "P." Some analysts, like those at Wedbush, think the coming iPhone 15 could be the product that helps give Apple a jolt. It has been a while since we've had an iPhone super-cycle. Whether or not the iPhone 15 entices the masses to upgrade remains the billion-dollar question.
Either way, Apple has a lot of exciting stuff coming over the next year - including its spatial computer in the Apple Vision Pro, which many investors and analysts seem to have dismissed or discounted in recent weeks.
Has spatial computing (or the metaverse) failed to launch? So far, it's hard to argue the point that virtual reality and augmented reality headsets have struggled to get off the tarmac. However, all it takes is one "ChatGPT" moment for the excitement to go from zero to one hundred.
When that moment happens is the big question. I think it's very likely to happen at some point over the next 10 years. Now, that's a long time to wait for a tech trend to take off. However, with Apple, you're getting a pretty great business that's able to keep raking in considerable cash flows while you wait for spatial computing's big moment.
Young Consumers to Propel Apple's Ecosystem Over Time
In the U.S. market, teen iPhone ownership is at a jarring 87%. That's more than doubled since 2012. Clearly, Apple is incredibly cool among today's young people.
These loyal, young customers are unlikely to switch to an Android product, given their distaste for those dreaded "green bubbles." Further, it is tough to break out of the Apple ecosystem once you've been drawn in.
In any case, Apple has hit the spot with younger consumers. And it's these consumers who will be sticking with Apple and its lineup of products once they grow up and start earning the big bucks. Undoubtedly, the Lifetime Value (LTV) of such consumers has the potential to be incredibly high. Perhaps it's this younger audience that will be quick to embrace Apple's spatial computer, Apple Vision Pro.
In the meantime, iPhone users are more likely to try other products under the Apple umbrella (think AirPods, iPad, Mac, and Apple Watch) while using various services, like iCloud, Apple Music, and Apple News. Of course, they'll also presumably be buyers of many iPhones over the decades.
For now, it seems like Apple users aren't locked into the ecosystem against their will. They just like how it is in the ecosystem. And for these users, the grass is definitely greener on Apple's side of the fence.
The Bottom Line
Apple stock's correction seems mostly due to valuation concerns. Primarily, investors want to see robust growth in the iPhone. With the iPhone 15, I think growth will re-accelerate, even if macro headwinds intensify.
Meanwhile, a majority of investors are overweighting the latest quarter (which was fine, by the way) and are losing sight of the long-term story, which still looks as good as ever. Recently, Morgan Stanley (MS) noted that the stock is “under-owned" among the large-cap tech stocks on its radar. To me, Apple's a company that's meant to be “over-owned!" The company's future looks bright, with young consumers standing by its side and new innovations coming to an Apple Store near you.
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