Covid 19 has mandated a digital lifestyle for us all. Apple is a gateway to this, an integrated platform for the development of app usage which goes far beyond the original uses of voice calls and texts

Unlike its fellow large cap FANG names ( Facebook, Amazon, Netflix, Google as well as Microsoft ) Apple has traditionally traded at a forward price-earnings ratio (P/E) below that of the broader equity market. The maturity of the smartphone market, elongating replacement cycles for iPhone, contracting gross margins on the iPhone and the “mother of balance sheets” (net cash reached over $150bn in 2015-16) that was not utilised for M&A, or for significant buybacks, all made it a poor relation to the other FANGs.

However, since the start of 2019 a curious thing happened; iPhone revenues in 2019 actually fell, but rather than resulting in underperformance it marked the beginning of a new era for Apple. The growth of the high margin services division comprising: music, licensing, the app store and licensing (from Google), as well as Apple Care, and the more recently launched Apple TV and News combined with the rapid growth of the wearables category (Airpods and Apple watches) offset iPhone weakness. This helped to shift perception of Apple from a single product cycle company to an eco-system and platform that deserved to be more highly valued. This also coincided with the company committing to use it’s balance sheet more aggressively to buyback stock and enhance its dividend.

Further, while the company has developed other engines of growth in services and wearables, it now sits on the cusp of another major new iPhone product cycle, with the likely introduction in late 2021 of a 5g iPhone – now being anticipated by investors. The company has vertically integrated and committed to manufacturing its own processors, which should allow for another round of innovation; with other new product categories ( more wearables) likely in the near future.

The company now trades on a higher P/E than either Facebook or Alphabet which have historically growth at a faster rate. Apple also now trades at a premium to the broader equity market, so going forward, upside to earnings we believe will have to be the key driver of the shares rather than the P/E.

For further information please contact:

Stephen Sobey
T +44 0207 818 2523
M +44 7836 631 776
E stephen.sobey@janushenderson.com