Shahid Jamil
Elevator Pitch
I continue to rate Apple Inc.’s (NASDAQ:NASDAQ:AAPL) stock as a Buy.
In my earlier update for Apple written on June 23, 2022, I highlighted that it was the right time to initiate a position in the stock during the dip. Since the publication of the prior article, AAPL’s share price has gone up by +18% which outperformed the S&P 500’s +8% rise over the same period. The recent Apple event, which is the subject of my current article, has reinforced my bullish view on the stock.
Investors should watch for a number of catalysts after the Apple event. These catalysts include stronger-than-expected sales volume growth, better-than-expected margin expansion, and upcoming events which showcase other new products and models in its pipeline. Considering the presence of multiple catalysts, I reiterate my Buy rating for AAPL.
What Was Unveiled At The Apple Event?
Apple hosted an event “introducing an all-new iPhone lineup, rebuilt AirPods Pro, and three new Apple Watch models” on September 7, 2022, as highlighted by the company on its corporate website.
The four new iPhones unveiled at the recent Apple event are the iPhone 14, iPhone 14 Plus, iPhone 14 Pro, and iPhone 14 Pro Max. A comparison of these phones taken from a September 12, 2022 CNET article is presented below.
The Key Differences Between The Four New iPhones
CNET
There are two key features that will be introduced for all the four new iPhones which are worth paying attention to. On its corporate website, Apple has referred to these new additions as “groundbreaking safety features designed to save lives.” The first feature is Emergency SOS that enables iPhone 14 users to send an SOS in the absence of mobile signals and Wi-Fi. The second feature is Crash Detection which will trigger an emergency call in the event of a serious vehicle accident.
Apple also announced a new version of AirPods Pro at the event held in the prior week. The latest version of the company’s AirPods Pro has the product’s battery life increased from four and a half hours previously to six hours now. In addition, AAPL noted in its media release that the new AirPods Pro boasts “better sound quality” in the form of “richer bass and crystal-clear sound”, and “double the noise-cancelling power of their predecessor.”
Separately, AAPL launched three new Apple Watch models, namely Apple Watch Ultra, Apple Watch Series 8, and Apple Watch SE, which are highlighted in the chart presented below.
An Overview Of The Three New Apple Watch Models
Apple’s Corporate Website
The spotlight is on Apple Watch Ultra as it is an all-new product, while both Apple Watch Series 8 and Apple Watch SE are updates of prior models. In its press release for the new product, AAPL emphasized that the creation of Apple Watch Ultra “was inspired by explorers and athletes” and it is designed to be used for “endurance, exploration, and adventure.” The two interesting things about Apple Watch Ultra that are worth mentioning are its size and pricing; Apple Watch Ultra is bigger (49mm case versus 45mm for the larger version of Apple Watch Series 8) and more expensive ($799 versus $399 for the Apple Watch Series 8 entry model).
In the next section, I touch on the key metrics relating to the new Apple products.
AAPL Stock Key Metrics
The key metrics to take note of with respect to the recent Apple event are the selling prices of the new models.
For the new iPhone 14 series, the company “kept like-for-like (US) iPhone pricing ‘unchanged'” for iPhone 14, iPhone 14 Pro, and iPhone 14 Pro Max, as noted in a September 8, 2022 Seeking Alpha News article which cited a research report from Morgan Stanley (MS). Separately, Apple has chosen to go with the iPhone 14 Plus instead of an updated version of the iPhone 13 Mini for the recent Apple event, so it won’t be appropriate to compare the two as they are different models.
Similarly, the new AirPods Pro is selling for $249, which is the same sales price at launch for the previous version of the AirPods Pro.
With regards to Apple Watches, the entry model for Apple Watch Series 8 is $399. This is unchanged from what the company charged for Apple Watch Series 7 when it was first introduced to the market. Also, the selling price of the new version of Apple Watch SE has been reduced by -$30 to $249.
In summary, it is clear that Apple has made a conscious effort to maintain the pricing for most of its new models that were introduced at the Apple event on September 7, 2022.
What Apple Stock Catalysts Should You Watch For?
In my opinion, investors should watch for three catalysts after the Apple event.
The first catalyst is better-than-expected volume growth for Apple, as the absence of price hikes for AAPL’s new models should be supportive of strong new product sales.
The early signs are encouraging. Seeking Alpha News reported on September 9, 2022 that “the delivery date of several versions of the iPhone 14 Pro and Pro Max have moved into the middle of October” in the US and Canada. A more recent Seeking Alpha News article published on September 12, 2022 making reference to a Wedbush Securities research report mentioned that, “demand and orders for iPhone 14 are tracking slightly ahead of iPhone 13 and are tracking ahead of our expectations.” It looks like Apple’s pricing strategy of having a good balance between volume growth and price increases is working well.
The second catalyst is higher-than-expected profit margins for AAPL.
Apple could have made the decision to increase the selling prices of the iPhone 14 Pro and iPhone 14 Pro Max, but this might have led to a higher proportion of users “downgrading” from the Pro iPhone models to the standard iPhone models. Instead, AAPL’s choice to maintain the selling prices for the Pro models appeared to have paid off.
Referring back to the Seeking Alpha News article highlighted above, Wedbush Securities’ research found a “‘very heavy’ mix towards the iPhone 14 Pro and iPhone Pro Max, which would benefit Apple’s average selling price” based on its analysis of demand for the new iPhone models. Based on the actual Wedbush Securities research report (not publicly available) which I had access to, the analyst has observed a “Pro/Pro Max mix” for iPhone 14 orders that is “in the 80%-90% range.”
A higher overall ASP (Average Selling Price) for AAPL driven by more users opting for the more expensive Pro models (versus the relatively cheaper Standard models)will be positive for Apple’s future profit margins.
The third catalyst is new product launches at future events.
The recent Apple event is notable for both the new models unveiled, and what wasn’t disclosed or revealed. New iPad and MacBook models could possibly be introduced at the next Apple event in October or November 2022, and there might be positive surprises in terms of specifications or features that excite the market.
Is Apple’s Long-Term Stock Outlook Positive?
The long-term outlook for Apple remains positive.
The investment thesis for AAPL in the long run has always been pretty simple and straightforward. Apple just needs to continue expanding its iPhone installed base and cross-sell more complementary products and services. Positive operating leverage and a more favorable mix with a bias towards higher-priced or higher-margin products and services will help to increase AAPL’s profit margins over time.
The recent Apple event shows that the company understands its long-term growth drivers well. By keeping selling prices largely unchanged for most products, AAPL has managed to strengthen demand for its iPhone products while pushing its users to go for the premium and more expensive models or variants.
Is AAPL Stock A Buy, Sell, or Hold?
AAPL continues to warrant a Buy investment rating. The initial indicators relating to demand and sales mix for Apple’s iPhones after the recent event are positive. This gives me the confidence that Apple is executing well on its product and pricing strategies, which translates into a Bullish view for its shares.
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