Today, Apple’s (NASDAQ:AAPL) stock is approaching its all-time high despite concerns about deteriorating macroeconomic conditions. Inflation, while starting to cool, remains above the Federal Reserve’s target rate, prompting the Federal Reserve to maintain its rate increases while signs of macroeconomic weaknesses, such as the current volatility in the banking sector, persist. As such, some investors worry that Apple stock could be expensive. However, I believe otherwise. Forex environment, for Apple, is becoming more favorable, reducing the headwinds the company is facing, and despite popular belief, I continue to see Apple’s version of innovation pushing consumer preference and demand forward, and this combinations will, in my opinion, sustain the rally as consumer demand for smartphones and discretionary goods returns by the end of 2023 or beginning in 2024. Therefore, I believe the current stock rally is sustainable and Apple is a bargain.
In its most recent earnings call, Apple’s management team clarified that the strength of the US dollar has created a headwind for them, as they have said that “the exchange rate will continue to be a headwind, and we expect a negative year-over-year impact from 5 percentage points.” This comment was made on February 2; today, however, the exchange rate environment has changed radically as global investors questioned the longevity of the US Federal Reserve’s intention to raise rates.
US banks began to show signs of weakness, prompting the US Treasury Department and the Federal Reserve to take swift action. The joint statement from the Treasury Department, Federal Reserve and FDIC said the government is taking “decisive action to protect the U.S. economy by strengthening public confidence in our banking system” by “protecting deposits and facilitating access to The government’s intervention signals to investors the potential constraints on raising interest rates, even after Federal Reserve President Jerome Powell made a strong statement to Congress days before the bankruptcy of Silicon Valley Bank. signaled to combat inflation. As global investors weigh up the likelihood of the Federal Reserve completing its rate hike in the near future, the US dollar has begun to fall against the rest of the world.
As the charts above show, the value of the US dollar continues its downward trajectory, which is likely to significantly offset the headwinds Apple is facing. In response to rising rates in 2022, Apple has significantly increased the price of its products in global markets, excluding the United States and China; so, as the exchange rate normalizes, I think Apple will see excessive profits from its price hikes in 2022.
Japan, the UK, Germany and more global markets saw a price increase for iPhone 14 in 2022. The price of a standard iPhone increased by 21,000 yen or 21.3% in Japan, 70 pounds or 9% in the UK and 100 euros or 11 .1% in Germany. Since these moves were made as a result of the strengthening of the US dollar, Apple is expected to benefit from both the price increase and the favorable exchange rate as the dollar’s strength weakens. Therefore, as the dollar begins to weaken against other currencies, Apple is expected to reap the benefits.
Innovation is still there
Many investors point out that Apple’s innovation has stopped because at first glance it seems like Apple is releasing the same product over and over again with minor changes. If this is true, it should be considered a significant risk as a technology company with a lack of innovation quickly falls behind its competitors. However, I believe that Apple’s innovation has never stopped. In fact, I still see massive innovation happening around Apple as Apple’s innovation is not defined by using all the latest technologies. Instead, Apple’s innovation comes from perfecting the latest technologies before they are released, even if it allows the competitor to get to market first. I consider this a critical advantage that Apple has.
Looking at Apple’s past product launches, I believe my claim is reasonable. Apple was never the first to market, but the product was considered one of the best when it was released due to Apple’s unique approach to innovation. For example, Apple didn’t invent the first smartphone, wireless earbuds, laptops, smartwatches, music streaming services, and tablets, but the company’s unique branding, marketing, and quality have arguably won Apple over in the market. Even in recent years, Apple’s version of innovation continued. There were plenty of competitors with lightweight laptops, but Apple perfected it by removing a fan in 2020 while maintaining performance. As such, I don’t think it’s fair to say Apple isn’t innovative today as the company’s innovation continued in its own unique way.
I believe these aspects of Apple create the company’s loyal demand. I don’t think the majority of consumers want the latest technology; instead, I think they want new technologies that work well, which is why I believe Apple’s customers tend to be loyal and market preference for Apple continues to grow. Not only did iPhone see its all-time largest global market share in 2022Q4, but according to the Wall Street Journal, “consumers around the world are increasingly choosing Apple Inc.’s iPhones over high-end Android smartphones.” This claim is backed up by a poll that “show[s] that people in their teens and early 20s” are increasing[ly] [seeing] the iPhone as a must-have.” Therefore, it might be wrong to say that Apple’s innovation has stopped while the company continues its own version of innovation and gradually increases the preference of the products.
While the global smartphone market is expected to decline by 1.1% in 2023, the market growth is expected to pick up in 2024 with a growth rate of 5.9%. Given that the forex headwinds may turn into tailwinds as Apple’s version of innovation continues to increase market share and preference for the company’s products, I think the company will get back on its growth trajectory as overall consumer demand improves.
Risk for thesis
Despite my optimistic view of Apple, macroeconomic conditions pose risks to my optimistic view. With cracks in the financial world beginning to show with Silicon Valley Bank, First Republic (FRC), Credit Suisse (CS) and possibly Deutsche Bank (DB), global economic conditions could rapidly deteriorate and trigger a recession. In such a scenario, my optimistic stance could be challenged as both consumers and businesses will cut discretionary spending.
Apple’s recent bullish run is likely to continue. For 2023, the company predicted continued forex headwinds; however, with a recent turnaround in the banking sector causing weakness in the US dollar, potential currency headwinds are likely to turn into headwinds due to Apple’s price hike in global markets in 2022. Further, with Apple’s continued innovation leading to customer preference and market share, I believe Apple is in a great position to return to a growth trajectory as consumer demand for smartphones returns by the end of 2023 or starts in 2024. Therefore, I continue to believe that Apple is a buy.