Apple Inc. (AAPL, Financial) still has growth potential, in my view, even after its 95% stock price rise in the past year.
The technology company is investing in innovative new services, adding new features to its existing products and has high customer satisfaction rates that could widen its economic moat.
Innovation
The company is investing in new products and services that could enhance its financial performance. For example, in its fiscal 2020 first quarter results, the business reported that its Apple Arcade video game subscription service is resonating with its customers. It offers exclusive games that help to differentiate it from other video game subscription services.
In addition, the company’s new services such as the Apple credit card, the Apple TV+ streaming service and Apple News could provide it with exposure to fast-growing markets outside of its core products such as iPhone and iPad. They could reduce the company’s risks and may contribute to it reporting a stronger financial performance in the future.
Apple is innovating within its established products and markets. For example, it launched its most powerful notebook in the first quarter that has been popular among business users. It also increased the number of cities where its Apple Pay Express Transit function can be used. It enables iPhone and Apple Watch users to tap their devices to ride trains and buses, which provides them with greater convenience. This could help to improve satisfaction rates among the company’s customers and may strengthen its market position.
Customer appeal
The number of Apple’s devices that are in use across the world increased by 100 million in fiscal 2019 to reach 1.5 billion. They enable the company to sell additional services, such as Apple TV+, to its existing users. This trend contributed to the business reporting a 120 million rise in the number of paid subscribers to its various services in fiscal 2019. It now expects to reach over 600 million paid subscribers by the end of calendar 2020, which could catalyze its financial performance.
The company’s subscriber numbers could rise over the long term due to the high satisfaction rates of Apple’s customers. For example, in the fiscal 2020 first quarter the business reported that 98% of its iPhone 11 customers are satisfied with their purchase. This highlights that the company has a wide economic moat that could produce resilient profit growth in the upcoming years.
Potential risks
The outbreak of coronavirus could negatively impact the company’s near-term prospects. The business has suppliers in the Wuhan area of China, where the coronavirus outbreak started. Its suppliers in other parts of China may also be impacted, since the reopening of some factories after Chinese New Year has been delayed. In addition, worries about contracting coronavirus could cause consumers in China and other locations to avoid public places, such as shopping malls. These factors may hurt Apple’s sales performance in fiscal 2020.
In response, the company is working on mitigation plans to ensure that it has a continued supply of products. Its suppliers in Wuhan are mostly alternate sources, and their lack of production may not affect its supply chain to a large extent. A fall in demand for the company’s products in China would hurt its financial performance, but it reported strong growth in other emerging markets, such as India, Turkey and Poland in the first quarter. They could deliver further growth in demand for Apple’s products that helps to offset a possible slowdown in China.
Outlook
Market analysts forecast that Apple will report a 10.3% rise in its earnings per share in fiscal 2020, followed by growth of 12.9% in fiscal 2021. Its price-earnings ratio of 25.7 is not cheap, but its growth strategy could catalyze its stock price in the upcoming years.
Disclosure: the author has no position in any stocks mentioned.
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