Apple, Amazon and Alphabet – these three companies have a combined market cap of 5.2 trillion dollars. Put in perspective, the 10 biggest banks in the US, have a mkt cap of only $1.5T. This is not groundbreaking news however, everyone from r/investing users to money managers have preached the QQQ and by extension, technology stocks. Afterall, they have historically outperformed ‘blue chips’.

Source: Bloomberg Markets - the XLF, a finance sector ETF compared to the QQQ, the tech benchmark

This year, however, that notion has been flipped on its head with septuagenarian banks outperforming the QQQ by 15%, and Apple by 21% YTD. As such, it is paramount to analyze if Apple, the largest of all tech companies, is still the guaranteed investment it used to be and if the XLF, and other blue chips, have the capability to offer better returns midst 2021 – where normality is expected to largely return.

Net Sales Breakdown

Whilst most would be quick to box Apple as ‘That iPhone Company’, Apple’s 10-K reveals something quite different.

Apple 10-K 2020 Product Sales Breakdown on Excel 2.0.PNG

As you can see from the spreadsheet above, the iPhone’s share in the total net sales (TNS) has been steadily dying; decreasing by 5% and 7% in 2020 and 2019 respectively. Taking its place is Apple’s Services and Wearables. The introduction of services like Apple Arcade, Apple TV, and Apple Fitness +, signal a clear pivot away from hardware.

Another subset of Apple’s sales not paid as much attention is its Wearable, Home and Accessories. Comprising of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and other Apple-branded and third-party accessories, it has seen a 76% gain over the past two years, and an increase in TNS share similar to Apple’s services sales. Wearable tech for the most part is health-oriented. In fact, the biggest selling point of the Apple Watch Series 6, released last year, was its ‘blood oxygen’ and ‘ECG’ sensors. Firms from Mckinsey, have championed the innovation in healthcare, stating that ‘technology-driven innovation may improve our understanding of patients, enable the delivery of more convenient, individualized care, and create from $350 billion to $410 billion in annual value by 2025.’ With Apple capitalizing on a demographic which has become increasingly health-conscious, it is clear that wearables will continue its flabbergasting growth for years to come.

Analyst Expectations and Risk Factors:

Whether AAPL stock price increases, is a different matter though and at least in the short term, will be driven by analyst expectations. Apple released its Q1 results on the 28th, reporting record first quarter results, smashing EPS expectations by 18%. According to The Wall Street Journal, AAPL target price ranges from $83 to $175 with an average of $151 and a median of $155.

Apart from COVID, Apple has multiple risk factors which could affect their revenue. Firstly, global and regional economic conditions could materially adversely affect the bottom-line. A sizable amount of sales happen outside the U.S. In fact, 60% of sales occur in Europe and Asia. With 18% happening in Greater China and 25% in Europe. Furthermore, since the manufacturing of many of Apple’s occur overseas, the company is vulnerable to supply-chain disruptions. Consequently, adverse macroeconomic conditions, including inflation, slower growth or recession, tariffs amongst other trade barriers, changes to fiscal policy, credit crunches, higher interest rates, high unemployment and currency fluctuations could materially adversely affect demand for products and services.

The effect currency fluctuations can have cannot be understated, however. For example, revenue in China, the Americas, Europe and the rest of the Asia Pacific (Ex China, Japan) suffered due to weakness in the respective currencies relative to the USD.

In addition, consumer confidence and spending could be adversely affected in response to negative financial and economic news.

Apple’s revenue may also be affected by competition due to highly competitive markets. It is for this very reason that Apple has been unable to penetrate some markets – like India, characterized by aggressive price competition. Such ‘price wars’ often result in slashed gross margins. Evolving industry standards, pressure for continual improvement in product price and performance and rapid adoption of technological advancement by competitors make for especially short product life cycles.

Moreover, Apple has a minority market share in the global smartphone, PC and tablet markets. The above mentioned make up around 80% of their net sales. Instead of pushing for a broader and lower priced product line strategy adopted by the likes of Samsung and Huawei. Apple juxtaposes this, offering few options for consumers, all of which are considered high-priced – thus relying on margin rather than volume. Competitors that rely on volume can afford to aggressively cut costs, offering prices at a fraction of what Apple offers and some have the resources or cost structures to take little profit, or even at times, losses.

Finally, Apple relies on the support from third-party developers. The landmark Epic Games vs Apple lawsuit has shown that developers are not afraid to go against the behemoth. Should major third-party developers like Microsoft, Facebook or Google refuse to develop applications for Apple’s ecosystem, consumers would be dissuaded to purchase Apple products. Withal, it is vital that developers maintain the notion that developing applications for Apple is worth the cost from a analytical and ergo, fiscal standpoint.

Apple is a multi-trillion dollar company, and as such, there are a myriad of factors that have the ability to materially affect it. For a full list, it is recommended that investors view its latest 10-K. The aforementioned are subjectively, the biggest risks Apple faces right now, and are well managed.

In conclusion, investors should make use of this opportunity to purchase a future forward and discounted Apple, one whom performance has proven to be independent of recession.