Tech bellwether Apple (AAPL) is still on track to become the world's first trillion dollar company and latest quarterly results on July 31 are expected to beat expectations.
Apple's share price hit a record high last month of around $193 in June before dropping back, and this is above Morningstar equity analysts' fair value estimate of $175 a share. We believe that shares appear modestly overvalued and recommend prospective investors seek a wider margin of safety before investing.
Part of our concern over Apple's competitive advantage or moat relates to switching costs for customers within the iOS operating system. We believe that switching costs around are Apple's primary moat source, and while we believe such costs remain strong today, we don't necessarily believe these switching costs are strengthening.
Apple’s competitive advantage stems from its ability to package hardware, software, services, and third-party applications into sleek, intuitive, and appealing devices. This expertise enables the firm to capture a premium on its hardware, unlike most of its peers.
Despite its admirable reputation, loyal customer base, and bevy of unique products, the consumer hardware space can be unforgiving to firms unable to consistently satiate the customer’s appetite for more features. Given the short product cycles of Apple’s products and army of firms targeting its dominance, we do not believe Apple has a wide economic moat, or strong competitive advantage.
Strong Growth Expected in 2018
Nevertheless, the firm’s ability to package hardware, software, services, and third-party applications into sleek, intuitive, and appealing devices remains very difficult to replicate. The robustness of Apple’s iPhone business, which we deem the most important for Apple, can be exemplified by its legion of loyal customers. 80% of US-based iPhone users said they planned to remain loyal to future Apple devices in an August 2017 survey by marketing platform Fluent.
We also see stable customer satisfaction trends, as we have not seen a significant dip that would give us concern that customers are seeking to flee the iOS ecosystem. We believe many iPhone users' foray into smartphones was via the iPhone, with familiarity of iOS preventing users from switching to Android, similar to incumbent software like Microsoft Office.
Following a solid rebound 2017 where Apple enjoyed healthy sales of iPhones, Macs, services, and other products, we think the firm is poised for stellar revenue growth of 13% in the 2018 financial year thanks to the iPhone X and iPhone 8 launches at higher average selling prices than prior iPhones. Meanwhile, both services and other products, including AirPods and Apple Watch, will grow 21% and 31%, respectively. While we foresee a slowdown in iPhone spending in the 2019 and 2020 financial years, we think the smartphone titan will deliver medium-term revenue growth in the mid-single digits.