Morgan Stanley Highlights Apple as Top Pick During Market Downturn

Apple (NASDAQ: AAPL), the renowned tech giant headquartered in Cupertino, has achieved prestigious market caps of $1 trillion, $2 trillion, and $3 trillion as the first company ever. Fueled by the widespread popularity of its flagship product, the iPhone, Apple has transcended beyond just a tech company to become a symbol of modern lifestyle. With a devoted global fanbase, Apple’s stock has long been favored among investors.

However, in recent times, the stock has experienced a dip of nearly 15% from its peak over the past year, with a year-to-date decline of about 12%. Factors such as slowing iPhone sales in China, regulatory challenges both domestically and internationally, and concerns regarding innovation in product offerings have all contributed to dampening investor sentiment surrounding the company.

Still, Morgan Stanley (NYSE: MS), a prominent financial services firm, suggests that the current downturn might present an opportune moment to consider acquiring Apple shares. With the fiscal Q2 results slated for release on May 2, analysts at Morgan Stanley advocate for investors to capitalize on any potential weakness in the stock following the earnings announcement.

According to analyst Erik Woodring, “We anticipate an outperformance in the March quarter results, followed by a conservative guidance for the June quarter. Despite these expectations, we believe the current stock price of $165 largely factors in these projections.” Woodring highlights the upcoming June (WWDC) as a pivotal event, particularly in terms of developments in artificial intelligence (AI) technology.

Apple has consistently delivered impressive results over the years. The company boasts a 10-year compound annual growth rate (CAGR) of 8.29% in revenue and 16.15% in earnings per share (EPS).

In the most recent fiscal quarter, Apple surpassed revenue and earnings estimates for Q1. Revenue for the quarter reached $119.58 billion, marking a 2.1% increase from the previous year, primarily driven by strong iPhone and services revenues. The company reported an EPS of $2.18, reflecting a 16% year-over-year growth and surpassing the consensus estimate of $2.10. Notably, Apple has exceeded EPS expectations in four out of the past five quarters, despite concerns about revenue deceleration.

Apple’s robust cash generation capabilities remain intact, with operating cash flow reaching $39.9 billion, up by an impressive 17.3% from the previous year. Ending the quarter with a cash balance of $40.8 billion, significantly exceeding its short-term debt of $10.9 billion, further underscores the company’s financial strength.

Additionally, Apple offers a dividend yield of 0.58%, with a consistent track record of annual dividend increases for over a decade. With a modest payout ratio of 14.89%, there is ample room for further dividend growth while supporting the company’s ongoing investments.

While Apple may appear to lag behind its tech peers such as Amazon, Microsoft, and Google in the AI race, expectations are mounting for significant AI-related announcements at the upcoming WWDC, as indicated by Morgan Stanley.

Between 2016 and 2020, Apple acquired the highest number of AI startups globally, with recent acquisitions such as French AI startup Datakalab highlighting the company’s commitment to on-device AI deployment. Notably, Apple prioritizes integrating intelligent solutions directly into its hardware, leveraging its powerful chips and memory design. Reports suggest potential collaborations with Google’s Gemini platform for iPhone AI features, along with advancements in generative AI through projects like the MM1 family of large language models (LLMs).

Despite a decline in overall smartphone sales, the premium segment, where Apple operates, has witnessed substantial growth in India. In 2023 alone, the premium segment grew by 23%, with the super-premium market experiencing an impressive 86% growth, indicating significant opportunities for Apple. The company’s inaugural company-owned stores in Delhi and Mumbai have also recorded promising growth rates, aligning with its broader strategy in the Indian market.

Following initial downgrades earlier in the year, analysts now exhibit cautious optimism towards AAPL stock. The consensus rating stands at a “Moderate Buy,” with a mean target price of $204.88, implying a potential upside of approximately 20.6% from current levels. Out of the 28 analysts covering the stock, 16 rate it as a “Strong Buy,” 3 as a “Moderate Buy,” 8 as a “Hold,” and 1 as a “Strong Sell.”

In conclusion, while Apple faces challenges, particularly in key markets like China, its strong financial fundamentals, ongoing investments in AI, and strategic focus on emerging markets such as India position it favorably for long-term growth. Investors may consider utilizing the current downturn as an opportunity to accumulate Apple shares with the potential for significant returns in the future.