Why Apple Inc. (NASDAQ:AAPL) Is Poised for a Bounce Back As 5G iPhones Loom

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Apple Inc. (NASDAQ:AAPL) has obliterated the market, as a 50% plus rally continues to affirm its premium valuation. The meteoric rise has already triggered a stock split as the tech giant sought to make its stock affordable for the masses. While the stock has tanked significantly, following the split, the stability of the core business affirms the company's long-term prospects and growth metrics amid a pandemic ravaged environment.

Ahead of the much-awaited annual iPhone reveal. Apple has shown it truly deserves its high valuation. The stock commands a hefty price to earnings ratio of 36 after trading with a conservative P/E of between 13 and 20 over the past ten-years.

The premium price tag does not come as a surprise. Apple has revolutionized the smartphone landscape, developing premium devices that have not only continued to generate strong demand but generate significant returns in the process. Having made a name for itself on the hardware front, the tech giant is slowly becoming a force to reckon with in the services front as well.

Apple's service segment is growing at an impressive rate as the tech giant continues to make a name for itself on cloud offerings, app store, music, and licensing offerings. The company has already shown it has what it takes to shrug off declines on the hardware front with a focus on the services front.

Apple has pulled lower significantly amid valuation concerns in the broader stock market. The sell-off comes at the backdrop of tech stocks surging to record highs supported by solid earnings results in the recent quarter.

Amid the pullback, Apple has still outperformed the market with the trend likely to continue, given the solid underlying fundamentals. A high probability of double-digit growth in FY2021 amid a subdued a COVID-19 environment, all but continues to strengthen the stock's sentiments in the market.

Why is Apple Outperforming the market?

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Apple iPhone 5G Launch

Apple has outperformed the overall market thanks to solid underlying fundamentals that continue to excite investment community. Even on becoming the first company to hit the $2 trillion valuation, Apple has continued to set standards in the tech space backed by an array of products and services that continue to elicit strong demand.

Reports that Apple has asked suppliers to build 75 million units of its next flagship 5G iPhones indicates the company is seeing stability amid a pandemic ravaged environment. A supply of 75 million iPhone would be in line with last years' launch, signaling strong demand for the company's most important product.

Apple is reportedly planning to launch four new iPhones, split into two basic and two high-end models. The unveiling of four models is part of the company's efforts of catering to the needs of various segments of the market.

According to internal estimates, the much-awaited 5G iPhones' supply could hit highs of 80 million units before the end of the year. In addition to new iPhones, the tech giant is also planning to launch new iPads, two new Apple Watch versions as it continues to rebrand its hardware line. Over-the-ear headphones are also poised to rock Apple store and a small HomePod speaker.

Apple's Growing Services Segment

Even as Apple continues to bet big on hardware, the company remains focused on the service segment where its future hinges. The services segment has been growing at an impressive rate faster than hardware, conversely accounting for a big share of revenues and gross profit.

The diversified Apple services segment encompasses digital content and services, Apple News, Apple Arcade, and Apple Care. The company is also flexing its muscles in the cloud with iCloud and in digital payments with Apple Pay.

Apple- Epic Games Stalemate

Apple store is at the heart of the services segment accounting for a big chunk of services revenue and the highest margin contributor. However, Apple has come under scrutiny in recent years over the way it treats developers in the app store. Similarly, there has been friction on the company insisting on the use of Apple Pay in the app store.

Epic Games is the latest casualty to Apple's demands, on implementing an in-app payment system within Fortnite instead of using Apple Pay. The tussle between the two will see Epic Games users barred from using Apple ID to sign in to games such as Gears of War and Fortnite.

Apple is already pushing for more subscription-based services to ensure revenue stability in its service segment. The services segment is poised to be a significant growth catalyst for the tech giant with the ability to generate as much as $100 billion per year in 2023.

Bottom Line

Even as the COVID-19 pandemic continues to hammer the global economy, Apple is firing on all cylinders as depicted by growth in its hardware and services business. Demand for iOS devices that often cost a fortune remains high. The company continues to see strong demand for iOS iPhones and iPads and Mac Computers.

A rapidly growing service segment also continues to justify Apple's premium valuation in the market. The service segment is poised to become a key driver of the bottom line as it is less prone to seasonality. Likewise the stock remains well positioned to bounce back after the recent correction given the robust underlying fundamentals.

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