Apple, Inc. (AAPL) is the company with the largest market cap and has showcased strong growth through the creation of new products, services, and setting new goals for the future. Last year alone, Apple’s services sector reached record highs, wearables set new records, and Q1 of 2021 iPhone sales beat the revenue from Q1 of 2020. Apple’s involvement in the healthcare industry, the mission to focus on selling services, and the strong possibility of a supercycle of 5G smartphone upgrades create a spectacular outlook for Apple stock.
Will 5G lead to a Super Cycle of smartphone upgrades?
With the competition in the smartphone industry intensifying, and the need to purchase devices to work from home that have arisen because of the pandemic, 5G can be viewed as a strong possibility to give a reason for consumers to upgrade their old phones or buy a new 5G phone. Apple’s rival companies like Samsung have already been all over 5G and started generating revenue in the first half of 2020 leading global sales. The launch of the iPhone 12 series has been a huge success in China with YoY growth in sales of 57%. A supercycle of the 5G upgrade in Apple’s iPhone 12 series is important for Apple to attract the attention of the Chinese market as China is the world’s largest 5G smartphone market.
Currently, U.S network carriers are still in the early stages of deploying 5G. But analyst Nicolas Gaudois believes 5G will generate 9% growth in revenue through 2025. Many analysts bet on Apple as one of the best 5G stocks to invest in as the company rolled out on their 5G iPhones in October 2020. Given Apple’s last supercycle which was in 2014 that generated billions of revenues for Apple after introducing larger screens on iPhones like its rival Samsung, there are positive signs that 5G would lead to a super cycle of iPhone upgrades this time around as well, resulting from the introduction of 5G technology. Most analysts are predicting that a super cycle of Apple’s iPhone 12 5G upgrade will spur sales growth this year, which many investors are anticipating.
Apple’s shift in focus to services instead of selling products
It’s the company’s historical success that has led Apple to be the first company to hit a trillion-dollar market cap in the world. So far, Apple’s mission to shift focus to selling ongoing subscriptions for things people can do on their iPhones has brought immense profits to the company. In the fiscal year 2019, Apple’s revenue from iPhones accounted for 54.7% of total sales, 17.7% from the growing services segment, and 9.8% revenue from the sale of MacBook. Though it’s hard to say which individual services are the most contributing to Apple’s revenue from services, the ones with the greatest number of subscriptions are Apple Music, App Store, iCloud, iTunes, Apple Pay, and Apple Care.
Although the revenue in products is slightly dipping, revenue from services has slightly increased from Q4 of 2019 (19.54%) to Q4 of 2020 (22.5%). In the virtual product launch of the iPhone 12 series, rather than selling the product, Apple sold many benefits to customers introducing terms such as “5G ultra-wideband network”, “low latency”, and “6-core CPU”, which has been rewarding to Apple because the company recorded its largest sales in history in Q1 of 2021, up by approximately 17% from Q1 2020.
According to Wedbush, Apple beating its previous sales record last year could boost Apple’s stock by 32% this year. I think Apple will continue to generate excessive profits by selling services. As Steve Jobs once said, “people don’t just want to buy personal computers; they want to know what they can do with them.”
Apple’s digital health care expansion
There has been a major digital health deployment around the world due to Covid-19, and Apple has a lucrative opportunity in the digital health care industry.
The expansion would allow people to use their smartphones and wearables from home to collect, analyze, and manage their health data and avoid paying thousands of dollars in healthcare costs. To successfully expand the healthcare ecosystem, the company aims to connect with leading players in the health care industry. The company already has an agreement with Medtronics, and the J&J Watson division to share and co-analyze health information of over 50 million people, and last Spring, Apple entered into another partnership with Google to develop an app that would detect if the user is close to someone positive for Covid-19. CEO Tim Cook said health and wellness will be the company’s biggest contribution to society. The initiative has strong potential to help people stay healthy at a low cost.
Apple’s dividend growth
Apple is increasingly reaching a mature stage in its business cycle, and similar to any maturing company, Apple is now focused on distributing wealth to shareholders. The dividend has grown in each of the last 8 years, and this streak can be expected to continue in the foreseeable future as the company’s expansion into the digital health care industry and the expected supercycle of smartphone upgrades will help the company grow its earnings, leading to a larger pot of available cash for distribution.
Takeaway
Apple is increasingly becoming a services-oriented company, and the expected bump in device sales will create a strong platform for the company to achieve this objective sooner than many analysts believe. The stock might no longer be a good pick for growth-oriented investors, but value investors should find Apple attractive priced given its maturing nature and the outlook for earnings and dividends.
Disclosure: The author does not own any shares mentioned in this article.
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