Apple is about to become the world’s first $3 trillion company and the question facing investors in 2022 is: could the party last, asks Boris Schlossberg of BK Asset Management?
There are several good reasons for bears to be skeptical about the stock’s recent meteoric rise, not the least of which is valuation and regulation. Apple (AAPL) is trading at the top of its valuation range nearing the 30X P/E, while top line growth is anticipated to be a modest 4.5% in 2022. Of greater concern to investors is possible regulatory oversight over the company’s monopolistic practices.
So far AAPL has been able to avoid any ruling to force it to open up its Apple Store payment protocols to any third-party vendor, which in turn would limit the company’s ability to collect a hefty 30% toll on any revenue collected. But litigation continues through the courts and it’s doubtful that Apple will escape completely unscathed. It will likely have to amend its terms with software vendors on the App Store platform.
The much bigger issue from a regulatory standpoint is Apple’s close and secret relationship with Google (GOOGL). Google pays Apple to make it the default search engine across all Apple products; and although neither company reveals the exact terms of the deal, analysts estimate that it could be as high as $15 billion in 2021 and could rise to $22 billion in 2022. This is a massive chunk of change for Apple, almost all of which ends up as profit on its bottom line. According to some estimates, the Apple/Google deal is responsible for as much as 15% of AAPL’s annual profits and if either the US or European authorities seek to overturn the exclusivity of the deal on anti-monopolistic grounds, the impact on the stock will be instant and severe.
Yet, for now, investors are ignoring the regulatory and valuation risks and are focusing on the next thing—which in the case of Apple is augmented and virtual reality. It is believed that the company has more than one thousand engineers working on the project, and it is expected to bring out its first set of products next year. Augmented reality, which superimposes digital images over a physical landscape, has long been viewed as the next big step in digital evolution; allowing for far more immersive experience in education, repair, tourism, retail, and even medical procedures. Still, adoption has been slow, and the market remains tiny. Analysts projected that AR would be a $100 billion business by 2020, but the reality is a far more modest $14 billion.
The bullish bet on AAPL is contingent on the company bringing AR into the mainstream in 2022 with a suite of software and hardware offerings that would make it highly compelling for consumers to adopt the technology. If Apple succeeds, it will be at the forefront of yet another trillion-dollar business and will maintain its leadership role in consumer technology. This is the true reason for the run-up in the stock, and if it can deliver in 2022, then most of the bearish worries will evaporate as AAPL tries to achieve a historic feat of generating growth from its $3 trillion dollar capital base.
To learn more about Boris Schlossberg visit BKForex.com.
