4. Apple Inc. (NASDAQ:AAPL)
% of shares shorted: 0.80%
Apple Inc. (NASDAQ:AAPL) has solidified its long-term leadership in the consumer electronics market by focusing on a high-end, closely connected ecosystem of products, services, and software. Apple’s flagship iPhone is the central component of this ecosystem, accounting for 46% of the company’s net sales. Hence, providing it with pricing power, switching costs, and network impact. All other Apple products and services get the most value from keeping users within this walled garden. With this strategy, the company has growth potential and makes it unique.
The California-based tech giant introduced Apple Intelligence, an AI-powered personal system for its new smartphones, in fiscal Q3 2024, perhaps sparking an iPhone upgrade super cycle. Sales of iPhones reached $39.3 billion YoY, and Mac revenue increased 2% to $7 billion YoY, contributing to the company’s $85.8 billion in revenue, a 5% YoY gain. AAPL’s economic moat is bolstered by its solid financial history, which includes growth in net income and revenue over the last ten years.
Morningstar analysts upgraded their estimation of the company’s fair value from $170 to $185 due to an improvement in their projection for iPhone revenue. Analysts predict strong iPhone-driven growth in 2025 and 2026, pushed by improvements to Apple’s artificial intelligence technologies. However, they still believe the firm’s stock is expensive, with the present price reflecting an unsustainable 20% iPhone revenue increase in fiscal 2025 amid headwinds in China and slowing upgrade cycles.
Baron Funds said the following about Apple Inc. (NASDAQ:AAPL) in its second-quarter 2024 investor letter:
“This quarter we re-initiated a position in Apple Inc. (NASDAQ:AAPL), a leading technology company known for its innovative consumer electronics products like the iPhone, MacBook, iPad, and Apple Watch. Apple is a leader across its categories and geographies, with a growing installed base that now exceeds 2 billion devices globally. The company’s attached services – including the App Store, iCloud, Apple TV+, Apple Music, and Apple Pay – provide a higher margin, recurring revenue stream that both enhances the value proposition for its hardware products and improves the financial profile. Apple now has well over 1 billion subscribers paying for these services, more than double the number it had just 4 years ago. The increasing services mix has led to healthy operating margin improvement, providing more free cash flow for Apple to reinvest in the business and to distribute to shareholders. Throughout its 48-year history, Apple has successfully navigated and capitalized on major technological shifts, from PCs to mobile to cloud computing. We believe the company’s leading brand and device ecosystem position it to do equally well in the AI age, and this was the driver of our decision to re-invest. “Apple Intelligence” – the AI strategy unveiled at Apple’s recent Worldwide Developer Conference – leverages on[1]device AI and integrations with tools like ChatGPT to enhance user experiences across its ecosystem. The AI suite enables users to create new images, summarize and generate text, and use Siri to perform actions across their mobile applications, all while maintaining user privacy and security. We think Apple Intelligence can drive accelerated product upgrade cycles and higher demand for Apple services. The combination of growth re-acceleration, increasing services contribution, and thoughtful capital allocation should continue driving long-term shareholder value.”
