After 5 years, why is Goldman Sachs optimistic about Apple again?

Recently, Goldman Sachs released an Apple research report, giving Apple a "buy" rating and setting a 12-month price target of $199.

The report quickly caused an uproar. On the one hand, because Apple's current stock price is only about $150, with a market capitalization of $2.38 trillion, and a target price of $199 per share means that Apple's stock price will hit a record high, and the total market value will stand at 3 trillion again.

On the other hand, this is also the first time that Wall Street's top investment bank has been bullish on Apple since 2017, and it is also the first time Goldman Sachs has given Apple a buy rating in so long. Of course, Apple's excellence is undoubted, but what has the top investment bank on Wall Street experienced from ignoring to optimistic? For the market and investors, people are more curious about whether Apple can hit a new high in market capitalization as Goldman Sachs expected.

This article has the following views on this incident:

1. At present, the smartphone industry is in a downward cycle, and it is difficult to avoid the impact of the cycle as strong as Apple. In 2022, Apple's share of the global smartphone market has increased to a certain extent, but shipments have also declined significantly. Especially in the fourth quarter of 2022, the decline in Apple's mobile phone shipments directly led to a decline in performance in the quarter. So far, the market is still pessimistic about the recovery of the industry.

2. Goldman Sachs is optimistic about Apple's core logic that Apple's excellent hardware design, perfect ecosystem and brand influence will promote the growth of Apple's mobile phone shipments, and the proportion of Apple's software service system revenue will also increase, which is also the embodiment of Apple's integrated moat of software and hardware. This logic, the second half has been verified to a certain extent, even in the fourth quarter of 2022, Apple's software services revenue has maintained positive growth.

3. Up to now, Apple is still the best performing technology company in the global market. Since 2022, Apple has seen the lowest decline among large tech stocks. Compared with other technology giants, Apple's performance is more stable and the prospects are more visible, which is the fundamental reason why Goldman Sachs is optimistic about Apple. However, this series of logic is based on the premise that Apple's hardware shipments have resumed growth, and this premise will not be verified until the new iPhone is launched in September this year.

01 The industry is declining, and Apple is difficult to stand alone

The decline in sales in the global smartphone market is an undisputed fact, even if it is as strong as Apple, it is also facing pressure from declining performance.

According to a market report released by IDC, global mobile phone sales were 1.206 billion units in 2022, down 11.3% from 1.360 billion units in 2021. Among mobile phone manufacturers, Samsung mobile phone shipments were 261 million units, ranking first, with a market share of 21.6%, an increase of 1.6 percentage points over the 2021 share; Apple mobile phone shipments were 226 million units, with a market share of 18.8%, an increase of 1.5 percentage points from the 2021 share, and the market share of Xiaomi, OPPO, and VIVO declined.

However, if you look at absolute shipments, Apple will also have a certain decline in 2022. Apple shipped 226 million units in 2022, down 9.4 million units from 236 million units in 2021. Among them, in the fourth quarter of 2022, Apple's mobile phone shipments fell the most obviously, and in Q4 2022, Apple shipped 72.3 million units, a decrease of 12.7 million units from Q4 2021.

For Apple, although shipments, revenue and profit in the global mobile phone market in 2022 have reached the highest level in history, returning to performance, the decline in mobile phone shipments directly led to the decline in performance.

In the financial report released in the first quarter of fiscal year 2023 (that is, the fourth quarter of the natural year 2022), Apple achieved operating income of $117.15 billion, a year-on-year decrease of 5.5%; Net profit was US$30 billion, down 13.4% year-on-year; Overall gross margin was 43%, down 0.8 percentage points year-over-year.

The decline in hardware product revenue is the core reason. In the quarter, Apple product revenue was $96.39 billion, down 7.7% year-over-year. Among them, iPhone revenue was $65.78 billion, down 8.2% year-on-year; Mac revenue was $7.74 billion, down 28.7%; iPad revenue was $9.4 billion, up 29.4% year-over-year; Wearables, home and other products achieved revenue of $13.48 billion, down 8.3% year-over-year.

In the quarter, Apple achieved software services revenue of $20.77 billion, up 6.4% year-on-year, and the software services business exceeded the $20 billion mark for the first time, setting a record.

However, in the case of the overall market weakness, with the decline in global shipments, even with strong brand influence and product technology strength, Apple is difficult to stand alone.

02 Why is Goldman Sachs optimistic about Apple's record high?

Even if Apple shows profitability far beyond other mobile phone brands, Goldman Sachs still gives Apple a "buy" rating and sets a 12-month price target of $199, which is very strange.

For this unusual confidence, Goldman Sachs believes that Apple's success in first-class hardware design and the resulting loyalty will lead to expanding installed capacity, which is expected to achieve revenue growth by reducing customer churn, reducing customer acquisition costs for new product and service launches, and encouraging repeat purchases.

Simply put, Goldman Sachs believes that the market's focus on slowing product revenue growth masks the strength of Apple's ecosystem and the durability and visibility of related revenue, and believes that Apple's hardware design capabilities and brand loyalty will enable it to achieve continuous growth in installed capacity while the industry declines.

This logic is actually not new, and it is easy to be recognized by the market. For example, Axon Enterprise, which was also recently rated "buy" by Goldman Sachs, is expanding to the SaaS service + hardware ecosystem of To G through the hardware product of the stun gun, which has a certain monopoly and a large switching cost. This is basically similar to Goldman Sachs' bullish logic on Apple.

In terms of software and hardware integration monopoly, Apple is the most representative. In the PC era, Apple focuses on a closed software and hardware ecosystem. In the field of smartphones, with the support of disruptive hardware products and excellent ecosystems, products such as the iPhone have become the world's most successful software and hardware integration ecology, which has also promoted Apple to become the world's most valuable technology company.

Goldman Sachs' logic is exactly this: Apple's hardware products will gradually recover or even regain growth, and the services business will achieve high year-over-year growth even in the fourth quarter.

However, there is a weak basis for Goldman Sachs' optimistic logic of Apple, that is, Apple's installed capacity growth. At present, Apple's software business accounts for less than 20%, while the iPhone accounts for nearly 60%. At the end of the day, Apple's revenue growth depends on the iPhone.

Apple will release a new machine in September this year, which will inevitably lead to a new round of replacement boom. However, it is an obvious fact that the attractiveness of Apple's products, represented by the iPhone, has continued to decline in recent years. In particular, Apple's closure in the field of software and hardware, such as the lack of fast charging, the unique charging port agreement, and the "Apple tax", are also affecting consumers' perception of Apple. The Android field spares no effort to promote the improvement of functions and systems under the market rollup, which further shakes Apple's industry throne.

03 Apple is still the best-performing tech giant

In essence, the integrated software and hardware ecology is indeed Apple's moat, and this moat will also offset the cyclical resistance of product revenue to a certain extent, which is why Apple will decline less than other manufacturers' installed capacity in Q4 2022. However, the core reason why Goldman Sachs is optimistic about Apple, and even optimistic about its new high, is that Apple is still the best performing technology giant in the world.

Among the six Internet giants that used to be FAANG and Microsoft, Apple is the company with the best stock price performance since 2022. According to the data, from January 1, 2022 to March 8, 2023, the stock price of META (formerly Facebook) fell by 45.01%, the stock price of Amazon fell by 43.67%, Google-A and Google-C shares fell by 34.93% and 34.58%, respectively, the share price of Netflix fell by 48.25%, the share price of Microsoft fell by 23.69%, and the stock price of Apple also fell, but the decline was only 13.28%.

Compared with the hardware technology giants with the highest market capitalization, Tesla's stock price fell by 48.33% in the same period, and NVIDIA, which is still in the semiconductor cycle, also saw a 17.69% decline in its stock price.

It can be said that whether it is hardware or software, Apple is the technology giant with the best stock price. As the saying goes, the moat is contrasted. In fact, compared with other technology giants, Apple's integrated software and hardware ecology and strong brand value are indeed more attractive.

This is also the fundamental reason why Goldman Sachs is optimistic about Apple: in the current market, there is no better technology company than Apple, with more stable earnings, clearer prospects and large volume.

For a top investment bank like Goldman Sachs, Apple is the best investment target. So far, Apple's valuation has fallen to 24 times due to the cyclical nature of the industry, which is lower than the average price-to-earnings ratio of 27 times in 2020-2022, which is one of the reasons why Goldman Sachs is optimistic about Apple.

However, based on the fact that the development of the smartphone industry has reached the ceiling, the global smartphone market, especially China, is generally involuted, whether Apple can stand alone, or even go against the trend to achieve installed capacity growth, and whether its stock price can reach a record high of $199 as Goldman Sachs expected, is unknown. This result may need to wait until Apple's new iPhone is on the market to be finally verified.