Apple’s (NASDAQ:AAPL) declining iPhone revenue and a rocky fourth quarter have hinted at a dim road ahead. This has also resulted in a recent sell-off of its shares as investors question the durability of the stock as we head into 2021.
For many, the underwhelming response to the recent iPhone release and a fall in overall sales is reason enough for a bleak outlook on AAPL stock. However, I firmly believe that despite the dip, the stock is a worthy investment for the long haul. Here’s my take on where Apple stands at the moment.
Wall Street On AAPL Stock
Apple stock faced a selloff after a grim outlook on its future. However, a high-level view of the stock shows that analysts are still bullish on its performance. This is because Apple has several catalysts that will drive its growth in the future. One, the company’s latest iPhone model experienced slow sales but this was offset by its other segments. Apple’s MacBook and iPad sales saw an exponential rise during the pandemic. Moreover, its service revenue also increased this year. This comes as no surprise given that many of Apple’s core services cater to the remote economy.
Another tailwind for the company is its 5G network. The potential of this innovation promises to boost the performance of Apple’s products in the coming years. At its current position, Apple sees the most impact on its top and bottom line from the sale of hardware products. While services only account for 16% of total revenue, iPhone sales contribute 40% of the total. Hence, the integration and development of 5G will lift AAPL stock in the future.
A third catalyst for the company is its new line of Mac products. The upcoming Macs will be equipped with the M1 chip. This new technology is expected to be a game-changer for its computers. Analysts predict that the performance of this chip will translate into higher sales of Macbooks. This gives bulls greater reason to believe in AAPL stock despite a pullback.
Apple’s Healthy Financial Position
Amidst mixed reviews on Apple’s stock performance, the company has also cut $5 billion in spending over the last two years. This comes from a decrease in manufacturing equipment procured from China. The company believes it can source the hardware pieces in-house. According to Barron’s, Apple also cut back on spending related to the environmental, social and governance (ESG) factors. The lower capital expenditure will give the company a healthier financial cushion.
Analysts predict the decrease in spending has freed up more than $6 billion in free-cash-flow. This is good news for the company given the financial uncertainty caused by the pandemic. The spending decline is expected to continue in 2021 as well. A bearish take on this cutback says that the lack of spending on outsourced components will result in higher prices for Apple’s hardware.
Given the current economic conditions, the cutback on spending by Apple is a good move for the future. Although the company will be able to recoup its losses when demand returns to pre-pandemic levels, the extra cash flow can help it weather the corona-economy.
The Bottom Line On Apple
Analyst Rod Hall, who is bearish on AAPL stock, slashed the price forecast from $80 to $75. This is well below the average analyst price of $123. Hall cites the decline in iPhone sales as a major reason for this move. Although the newest iPhone did see a dip in sales compared to its predecessors, I still think that Apple stock is a keeper.
The coronavirus pandemic created abnormal shifts in consumers’ spending and could be a potential reason for the iPhone’s poor sales this quarter. However, Apple is also making some bold moves with its service offerings. While the bottom-line impact of this is not as great as hardware sales, there is still a lot of room to grow. In any economy, remote or otherwise, I think Apple’s services (Cloud, Music and Fitness) will be a major catalyst for growth.
AAPL stock price is down right now from the recent sell-off. Use this opportunity to make your move on the stock rather than see it as a setback.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.