Apple is one of the most closely watched stocks on Wall Street, and analysts are pretty much all bullish on the company. Its massive growth over the last eight years has raised investor expectations, although the company’s stock saw a setback a couple of years ago when investors began to expect too much.
Is Apple’s (AAPL) current growth rate sustainable?
So are expectations beginning to get too high again, or can Apple Inc. (NASDAQ:AAPL) sustain the current level of growth it enjoys for another eight years? Some argue that the company could simply be too big to grow, and if this is the case, Apple could fall out of the good graces of growth investors just as Google has.
On the other hand though, China offers the iPhone juggernaut a vast opportunity for growth in the near term. Of course it’s worth considering whether China is the final frontier, but if it is, then Apple Inc. (NASDAQ:AAPL) probably still has plenty of years before a major slowdown in growth will occur.
Apple (AAPL) enjoys growth in China
Analysts from multiple firms have highlighted how well Apple is doing in China right now. The company’s products are seen as status symbols, and most Chinese consumers seem excited to get their hands on them. Indeed, growth in China probably won’t slow down any time.
The latest firm to put out a report on Apple’s growth in China is UBS. Analyst Steven Milunovich lists three reasons Apple can continue seeing success in China. First, he sees a “substantial” flow of consumers into the middle and upper middle classes. In fact, he expects the percentage of the upper middle class population to more than double in the next seven years.
Second, he said Apple Inc. (NASDAQ:AAPL) products sell well even to consumers with lower income levels. And third, he noted that Apple will continue to benefit from China’s rollout of 4G mobile service, as well as plans to double the number of Apple Stores there and improvements in the company’s China website.
The March quarter marked the first time Greater China iPhone sales were greater than those of North America. According to Milunovich, not only is the iPhone the bestselling high-end smartphone but also the bestselling phone overall.
Latest Apple (AAPL) China survey
UBS recently conducted a survey in China and discovered that Apple’s products are hot items among consumers in “multiple” income segments. Of course the company does best among high-income Chinese, but it also remains competitive even among those who make less than RMB 200,000.
Further, Milunovich reported that the survey indicated that many Chinese expect to spend more on their next mobile phone and that Chinese Apple Inc. (NASDAQ:AAPL) users upgrade every 19 months on average. And finally, he stated that Apple has earned the highest score in brand commitment among vendors, although it is at a “fairly low level,” which he suggests means there’s room to create more stickiness.
In general, the analyst thinks investors might be underestimating what Apple can do in China. He has a Buy rating and $150 per share price target on Apple Inc. (NASDAQ:AAPL).
Is Apple (AAPL) too big to keep growing?
Trefis analysts, on the other hand, consider whether Apple has reached the point at which it is simply too big to keep growing. They are also bullish on the company and have a similar price target to that of Milunovich at $144 per share, but they note that there are risks to Apple where growth is concerned.
Trefis points out that the average price target on Apple stock assumes an earnings multiple of 14.5 times 2015 fiscal earnings. That compares to the S&P 500’s earnings multiple of 18 times. As a result, Apple looks cheap, but there is now a chance that the law of large numbers will catch up and overtake the company. In addition to the law of large numbers, Apple also shows overreliance on the iPhone, which makes up about 60% of revenue, while other product lines, when combined, saw declining revenues.
What about other product lines?
The firm further notes that whenever a new product line or a product refresh is introduced, Apple’s growth rate does see a “spurt.” Trefis sees more room for the iPhone to grow as only about 20% of iPhone users have upgraded to the two newest models.
The Apple Watch was recently released, and most analysts tend to agree that it won’t be a major game-changer for Apple, although some have found that demand appears to be strengthening. And what of future products like the rumored car (if it actually happens) or the rumored TV service? Trefis expects iDevices to continue to overshadow these products, however.
Despite these considerations, the Trefis team remains convinced that Apple will continue to post strong growth. However, they think it will be “challenging” for the company to keep pushing double-digit growth rates. Apple Inc. (NASDAQ:AAPL) still remains dependent on iOS, and it’s becoming difficult to find new areas in which to expand the platform.
For now, they see any potential valuation upside as coming from an expanded multiple if Apple continues to demonstrate solid sales and margins, especially for the iPhone.
