Shares of Apple (AAPL -1.80%) are up 14% year to date, outperforming the 4% return of the S&P 500 index. There are good reasons Apple stock is leading the market higher in 2023. iPhone demand has held up better than Wall Street expected given the macroeconomic headwinds. Most importantly, Apple appears set to introduce new revenue streams over the next several years that could send its stock much higher.
Let’s dive deeper into why you should buy Apple stock before the next bull market.
1. Strong outlook for iPhone sales
Apple has seen steady growth over the past several years. But even though total revenue in the most recent quarter is up 28% compared to the same period three years ago, investors have been concerned about supply chain constraints and lower shipments in China weighing on iPhone revenue. In its fiscal first quarter, ended in December, the company reported revenue of $117 billion, which was down 5% year over year, with iPhone revenue down 8%.
AAPL Revenue (Quarterly) data by YCharts.
Demand for the new iPhone 14 lineup has been strong, but sales were weighed down by supply shortages last quarter. However, improving supply in China is expected to drive more growth from Apple’s best-selling product in the near term.
UBS analyst David Vogt estimates that China smartphone shipments in December were down 18% compared to a 30% increase in the same period in the previous year. But Apple’s iPhone shipments in China outperformed the rest of the market, rising 88% in December over November’s totals.
The recovery in China sets up an acceleration in iPhone revenue growth next quarter. Management is guiding for total revenue to be in line with the quarter ended in December. For iPhone, specifically, Apple expects revenue to accelerate over the December quarter’s year-over-year growth rate.
2. Growing demand for apps and subscriptions
Apple’s services revenue rose just 6% year over year, compared to a robust 24% increase in the year-ago quarter. That might have disappointed some investors, but as we saw with iPhone, Apple is doing much better here than its headline number suggests.
One of the largest drives of Apple’s services business is advertising, which makes up an estimated 60% of services revenue, according to Bernstein analyst Toni Sacconaghi. Investors can blame the weak ad market for Apple’s soft services performance, but demand for Apple’s non-advertising services is doing just fine.
Apple’s services revenue came to $20.8 billion in the last quarter, which was better than management expected. In fact, App Store subscriptions grew by double-digit percentages, with revenue achieving all-time highs in cloud and payment services.
Apple’s growing installed base of devices, now over 2 billion, should become an increasingly important growth driver for the company — which is another catalyst for the stock.
3. Optionality
The latest reports have Apple unveiling its long-rumored mixed-reality headset in June at its annual developers’ conference. Other reports say Apple is deep into developing a self-driving car using its in-house chip design. Whatever is going on, Apple’s annual research and development (R&D) expense has more than doubled over the past five years to $27 billion. The company is investing in new products and services that may not even be reflected in the its current valuation.
AAPL Research and Development Expense (TTM) data by YCharts.
One opportunity that is already contributing to a growing stream of revenue to Apple is advertising. Sure, advertising revenue was estimated to decline last quarter, but over the long term, Apple is well-positioned to turn advertising into a large and profitable revenue stream.
Bank of America analyst Wamsi Mohan estimates that if Apple monetizes ads outside the App Store, it could become a $20 billion business over the next four years, which would equal Apple’s current quarterly revenue from services right now.
To sum up, easing supply constraints on iPhone sales, growing demand for non-ad services, and the opportunities to introduce new revenue streams over time are key catalysts that can drive more growth for Apple and send the stock higher.
While the stock isn’t cheaply valued, at 25 times expected earnings this year, it’s also not expensive. The stock’s outperformance so far this year is giving investors an insight into how well Apple shares can perform as the business continues to grow over the next decade.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Bank of America. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
