Similar to its big-tech counterparts, Apple (AAPL 5.98%) has faced its share of road bumps throughout 2022. There is no denying that the technology behemoth has created one of the most iconic brands in modern history. There is something unique about the company's sleek aesthetic that make its hardware easy to identify, and more importantly, desirable.
While the company recently reported record revenue during its Q4 fiscal year 2022 earnings call, it's important for investors to peel back the onion. As a direct-to-consumer business, Apple is not immune to the effects of inflation. Moreover, as a company that partners with suppliers globally and outsources some development overseas, Apple has also been forced to navigate around supply chain disruptions as well as the lingering effects of COVID-19 in some geographic areas.
Let's take a deep dive into Apple's entire business and learn why the company and stock are so resilient despite some near-term headwinds.
Demand for iPhone 14 is cloudy, but that's OK
Generally speaking, when goods and services become more expensive, consumers will act with more caution about how they spend their money. Although inflation is certainly trending in the right direction, there is a long, arduous road ahead before consumers may feel comfortable stretching their budgets. During times of prolonged economic uncertainty, people may delay luxury purchases.
For example, while getting a new car may be something you want, your current vehicle is still perfectly capable of transporting you from one point to another safely. Moreover, while your end-of-the year bonus may have been more than you anticipated, perhaps you do not need to splurge on a new watch. After all, your current watch still tells the time. This same paradigm can be applied to Apple and its good and services.
Apple is famous for its innovative product lineup, which includes the iPod, iPad, and Apple Watch. However, perhaps the company's most popular device is the iPhone. Since its inception in 2007, Apple has continued to release new and improved versions of the phone nearly every year. And, in most cases, consumers will line up outside of Apple retail stores days before a release just to secure the latest hardware. However, the company's latest installment, the iPhone 14, has been a mixed bag.
Apple CEO Tim Cook said during the earnings call: "In terms of the new products, the 14 and the 14 Pro and Pro Max, it's still very early. But since the beginning, we've been constrained on the 14 Pro and the 14 Pro Max and we continue to be constrained today."
There are a multitude of reasons for these constraints. Apple outsources some iPhone development to factories in China, but due to the lingering effects of COVID-19 and subsequent lockdowns, production facilities have been challenged. Additionally, given concerns around inflation and a potential recession in 2023, consumers are weighing the necessity of a phone upgrade that could cost north of $1,000. While demand for the iPhone 14 remains a bit cloudy, there are still plenty of reasons to be bullish on Apple stock.
Beyond the iPhone
In addition to new iterations of the iPhone, Apple has also invested heavily into new growth areas such as streaming. Although streaming has long been dominated by Netflix, there are a host of competitors on the rise including Disney and Apple.
Apple currently does not break out the size of its streaming division, Apple TV+, in terms of revenue or number of subscribers. However, some on Wall Street believe that Apple TV+ produces roughly $1 billion to $2 billion in annual revenue. While this is purely an estimate, one can safely assume that Apple TV+ contributes a trivial amount to the company's overall picture. This is actually a positive for Apple.
For reference, Netflix generated about $30 billion in total revenue in 2021. Given Apple's proven ability to create products and services that consumers will pay a premium for, coupled with its staggering $24 billion of cash on hand, the company is in a solid position to potentially create its next growth engine in the form of streaming, which could yield tens of billions of dollars in sales.
In addition to streaming, Apple is doing its best to sidestep supply chain hiccups and shutdowns in its overseas manufacturing facilities. Apple's largest chip manufacturer, Taiwan Semiconductor Manufacturing, recently announced that it will spend tens of billions of dollars building two new chip facilities in Arizona. Given Apple's heavy reliance on Taiwan Semiconductor as a key supplier, shifting labor from overseas to U.S. operations should help the company navigate some of the supply chain nuances it's had to bear over the course of this year. In essence, by moving manufacturing to Arizona, Apple should be able to better keep up with demand trends for its hardware.
Image source: Getty Images.
Keep an eye on valuation
At the time of this writing, Apple carries a market capitalization of $2.3 trillion and trades at 23 times its trailing 12-month earnings. The long-run average of the S&P 500 is around 15 to 16 times price to earnings.
Despite this premium, investors should keep a few financial metrics in mind. For starters, per the earnings transcript, Apple increased its free cash flow by 20% year over year to $111 billion. That is absolutely staggering. Think of it this way: Even during times of economic uncertainty, fear of recession, and high inflation, Apple is still growing its cash flow by double-digits.
If that weren't enough to encourage you, Apple's board of directors also recently paid a cash dividend of $0.23 per share. So again, even when most other companies are tightening budgets, Apple is finding a way to reward its shareholders.
At the end of the day, Apple stock has always been resilient. The company has been around for decades and has weathered many storms. Despite its lofty valuation, long-term investors should be excited to buy more Apple stock and witness the company continue to grow and innovate.
