Despite certain U.S. banks going under and a substantial slowdown in economic expansion during the first quarter of 2023, Apple (AAPL -0.35%) had a great beginning to the year. Its stock rose by an impressive 39% year to date compared to the S&P 500's 10%.
Investors hold varied opinions on whether the stock is fairly valued or overvalued, given its price-to-earnings (P/E) ratio of 29.8, which surpasses the stock's median P/E ratio of 17 over the past 10 years and the P/E ratio of the S&P 500, which is 24.4. Nevertheless, despite not being available at a discounted price, Apple remains a top stock to purchase. Here's why.
International growth plans
With a market capitalization of $2.7 trillion, Apple is the world's most valuable company. Despite concerns about its sheer size and maturity hindering its ability to generate revenue and profit growth, it's worth noting that iOS remains the dominant operating system in the U.S., and the company has the potential for solid international expansion against Android, which currently holds near 70% of the global market share. So although it may be pushing up against market saturation limits within U.S. markets, it still has plenty of room for needle-moving growth internationally, especially in emerging markets.
Apple's rapid expansion into international markets is a no-brainer. Here are four reasons why:
- Global economic growth has created a favorable environment for Apple. As more people worldwide have disposable income, they are increasingly interested in purchasing Apple products.
- The population of middle-class consumers in emerging markets is rising, which means there is a growing market of people who can afford Apple products.
- The world is becoming increasingly urbanized, which means that more people live in cities with access to Apple stores and other channels to purchase Apple products.
- Many citizens in emerging markets see Apple products as status symbols, meaning consumers are willing to pay a premium.
During its fiscal second quarter 2023 earnings call, management reported breaking sales records in several countries, including Indonesia, the Philippines, Malaysia, Saudi Arabia, Turkey, United Arab Emirates, Brazil, Mexico, and India. Additionally, with China reopening, investors can anticipate solid growth eventually resuming from that region as its economy rebounds. Chief Executive Officer Tim Cook believes the company gained market share in China during its second quarter.
In short, Apple is well positioned to continue expanding into international markets for the foreseeable future.
Apple has generative AI plans
Since the release of ChatGPT by OpenAI in late 2022, there has been curiosity about Apple's plans for their own advanced artificial intelligence (AI) technology. As a result, an analyst asked Cook about generative AI during the company's earnings call in early May. However, he gave a cautious response to avoid revealing too much information:
As you know, we don't comment on product roadmaps. I do think it's very important to be delivered and thoughtful in how you approach these things. And there's a number of issues that need to be sorted, as is being talked about in a number of different places, but the potential is certainly very interesting.
However, we know Apple is actively working on the technology. Many news outlets have reported multiple job postings for machine learning engineers specializing in generative AI.
It wants to explore the potential of this new technology to create innovative products and services that were previously impossible. For example, possibilities include the development of a ChatGPT-like virtual assistant that can recognize and respond to everyday language, potentially eliminating the need for competing search or AI services on Apple devices. Apple could also become a significant player in the search market, competing with companies like Alphabet's Google, and Microsoft's Bing.
The possibilities for new products and services are endless, including photo editing apps and games that can generate new levels and challenges on the fly. Overall, the potential revenue and profit-generating capabilities of generative AI products could significantly boost Apple's valuation over the long term.
The stock could flatline in the short term
Apple is a highly cyclical company, meaning the economy's overall health drives its sales and profits. As a result, people are predisposed to spend money on discretionary items like new iPhones and iPads when the economy is doing well. Alternatively, when the economy is in a downturn, people are determined to cut back on their spending, which can hurt Apple's sales.
You can see how high inflation, rising interest rates, and slowing growth harmed Apple's revenue and profit growth over the last two years in the chart below.
AAPL Revenue (Quarterly YOY Growth) data by YCharts.
Economists at the Federal Reserve predicted in March that the U.S. economy would have a modest recession in the last half of 2023, meaning that the economy is likely to contract for two consecutive quarters, which is the technical definition of a recession. If this happens, Apple's stock price will likely fall as investors become more risk-averse, and it might be an excellent opportunity to buy it at a lower price.
A recession is not guaranteed
Some economic experts do not believe that a recession will likely happen soon. For example, Mohamed El-Erian, chief economic advisor at Allianz, thinks the U.S. economy is robust enough to steer clear of a recession in 2023 and argues that the number of job openings far exceeds the number of unemployed people, indicating an economy where businesses still hire, and people can find well-paying jobs. Additionally, it suggests that the economy is still growing.
If El-Erian is correct, investors waiting to buy Apple at bargain prices during a recession may never get that opportunity. And if you believe in Apple's long-term potential and can withstand potential short-term losses, you should buy the stock today.
