4. Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 184
Apple (NASDAQ:AAPL) could face a reduction in its prized gross margins if President-elect Trump imposes tariffs on Chinese imports, according to research firm Jefferies. However, there remain many uncertainties at this stage, the firm said.
Analyst Edison Lee, who holds a “Hold” rating on Apple Inc (NASDAQ:AAPL), noted that the company was exempt from import tariffs during Trump’s first term from 2016 to 2020. Since then, Apple Inc (NASDAQ:AAPL) has taken steps to diversify its production outside of China, such as shifting some manufacturing to India. Despite these efforts, only about 10% of iPhones are produced outside of China. While it’s possible that Apple Inc (NASDAQ:AAPL) could secure another exemption, Lee suggested that if it doesn’t, the impact on gross margins could be significant.
“[Our] analysis indicates AAPL’s [gross margins] could potentially be impacted by 3.0-6.7ppt, and our DCF value by ~5% to 10%, assuming no ASP/vol change,” Lee wrote in a note to clients.
Polen Focus Growth Strategy stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q3 2024 investor letter:
The largest relative detractors during the quarter were Apple Inc. (NASDAQ:AAPL), Airbnb, and Tesla (not owned). We added a new position in Apple during the period, which we discuss further in the following section. While Apple is a roughly average-sized position in Focus Growth, it is the largest holding in the Russell 1000 Growth Index, at over 12%, and the stock’s outperformance in the quarter weighed on relative results.
In the third quarter, we purchased new positions in Apple. We owned Apple from early 2009 through late 2016, a period characterized by the massive iPhone-driven growth phase propelling the company’s revenue and earnings to levels almost unseen previously. We moved on from the position in 2016 as we felt Apple had nearly fully penetrated the high end of the smartphone market, which by and large proved correct. Revenue growth has since compounded in the mid-to-high single digits, with earnings growth modestly higher, driven by heavy share buybacks. In the last two years, the company’s revenue and earnings growth has slowed to essentially 0%.
Apple can now upgrade Siri to the true helpful digital assistance consumers hoped it would be all along. Not to mention, the new operating system brings useful new features to not only Apple apps and services but also seamlessly across third-party apps. We believe this means a multi-year upgrade cycle is coming for iPhones that will be unveiled later in 2024 and into 2025. The elongation of the iPhone replacement cycle over the last few years is likely to stop or even reverse, pulling forward stronger revenue, earnings, and free cashflow growth for Apple over the next few years. We expect this to not only accelerate iPhone volume growth but also likely a product mix shifting to higher-priced, higher-margin iPhones. We also expect the AI functionality to be more impactful with bigger screens, processing, and memory. With consumer budgets getting tighter, we feel the new Apple phones with GenAI functionality will become a top priority for consumers versus other areas of spend, which we expect could give a safety-like quality to the acceleration. While the company’s valuation at just under 30x forward earnings is not cheap, we feel the earnings acceleration will allow Apple to generate at least double-digit returns (possibly even mid-teens) over the next few years, earning its place in our Focus Growth Portfolio.”
