Apple remains ‘a rock-solid story,’ analyst says

CFRA Research Senior Equity Analyst Angelo Zino joins Yahoo Finance Live to discuss Apple’s push into India, the opportunities for demand and production, initiating a Buy rating on the stock, investor sentiment, and the outlook for Apple.

Video transcript

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- Let's take a look at how Apple shares are faring and having a good 2023. Could a new growth push lead to more upside? Fresh sales data out of India making clear why the drive into the nation is becoming so important to the tech giant. Revenue grew by almost 50% in the year through March, from $4.1 billion to $6 billion. That's according to reporting from Bloomberg News.

Well, Apple's strategic shift starts with its first retail stores opening in Mumbai and New Delhi this week. India has been highlighted as a potential hub for growth and signifies something of a shift away from its reliance on China. Joining us now is Angelo Zino, CFRA Research Senior equity analyst. Thank you for joining me in this morning. So we know that Tim Cook bullish on India, not just from the retail perspective, but also on the production side. How big of an opportunity does India offer on both fronts here?

ANGELO ZINO: We think it's massive, to be honest with you. I mean, there's an enormous opportunity if you look at where China is today. And if you're a believer that India is essentially where China was 15, 20 years ago, which is kind of the analogy that Tim Cook has made in the past, then you are very optimistic about the potential on both the demand side of things, as well as on the production side of things.

And you specifically look at the demand side of things, right, I mean, I think Apple sold about 7 million units in India last year alone, whereas-- and they've got about 1.4 billion people in India alone. You look at, compare that to, let's say, North America, where you've got about 340 million people and Apple probably delivering about 75 to 80 million units, and then in China, which is probably the most comparable analogy out there to India, you're looking at about 280, 290 million units sold on the smartphone side of things last year and Apple having about 18% market share, roughly about 50, 55 million units, that 77 million unit number has significant upside potential here, we think, over the next decade to go, which kind of is understandable why Apple is so bullish about the opportunity in India specifically on the demand side of things.

- So what should people keep in mind, though, context wise when they do compare the Apple China relationship to the Apple India relationship?

ANGELO ZINO: Yeah, I mean, listen, I think investors, first off, need to know that this isn't going to happen overnight, right? I mean, we're talking about the first two retail stores opening up here. But I think what's most important is the fact that the reason Apple was so successful, we think, in China was, one, the retail footprint that they gained over the years, but also the wealth effect within China.

And that's what you're going to see in India over the next 15 to 20 years, we think. This is kind of a market that's still a very emerging market in nature. So over time, as you kind of see that wealth effect take place within India, that represents an enormous opportunity for Apple, which kind of exclusively operates at the high end of the market, right? So as you get that take place over the years, that's going to lead to more market share gain potential for Apple, which today still has less than 5% share of the India market.

- So definitely lots of growth to be had here. I want to talk about, you have a buy rating on Apple, a 12-month price target of $165. Why do you still like this premium valuation, despite some of these macro headwinds that we see coming down the pipeline?

ANGELO ZINO: Yeah, I mean, listen, I think when you think about some of the macro headwinds out there, it's really interesting because as we go over the next couple of quarters here, a lot of those headwinds, we actually think, are going to start to alleviate because of some of the easier comparisons out there. And as you go into the second half of the year, clearly you're going to lack some of those supply constraints that they witnessed a year ago. You're going to lack against some of the tougher forex numbers that they had to witness a year ago. And think about Apple's numbers would have been significantly better a year ago if not for some of those forex headwinds.

And, of course, on the services side of things, we saw a number of gaming China-related headwinds as well. So we think that we are going to hear a lot of potential acceleration of growth as we go through the calendar year here this year because of some of the easier comparisons. Because of the forex and because of those supply constraints from a year ago.

And, as a result, I think at the end of the day here, this is a company where you start seeing the accelerating growth into the rest of the year. It should of sustain some of the more elevated multiples we see in the stock. And as you go into '24 and '25, the opportunity over there, we think, continues to be potentially on the foldable phone side of things, which is going to command higher average selling prices, potentially a new kind of upgrade cycle up there. So that's another opportunity out there, maybe longer-tail nature, but nonetheless, something investors should start thinking about as we go into '24 and '25.

- And, of course, one of Apple's strongest selling points is the ecosystem itself. And we saw that recently announced that they're launching their Apple Card savings account with a 4.15% annual percentage yield, no minimum deposit or balance there. What is your take on this evolution for Apple in the fintech space?

ANGELO ZINO: Yeah, I mean, listen, I think it's an opportunity out there. It's not something that's necessarily going to be a needle driver for the company. But, again, it's something, to your point, the company continues to throw incremental new offerings and opportunities out there for investors, also ways for them to find ways to make the iPhone more affordable on their end potentially, as well as just again, incrementally, evolving their ecosystem there and coming out with new growth opportunities and new offerings out there.

And I think, again, it's not something that we think is going to really be a needle driver for this company. But when you put it in totality with some of their other offerings out there, again, the services side of things, we think, again, longer term in nature, becomes a much bigger opportunity, of course, is a higher-margin business for them, 2x the margins of the hardware side of things. So the more they continue to penetrate on the services side of things, the better for investors.

- And just lastly, any risks that you see to that 12-month price target in terms of Apple's products and services that could perhaps give you pause?

ANGELO ZINO: Yeah, I mean, listen, I think there are always risks associated with this name. For us, it's always on the regulatory side of things. You don't know necessarily what is going to come out on the China-- on the Europe side of things or even China side of things, as well as here locally within the states.

But there's, at some point in time, we do expect them to adjust the fee structure of the App Store out there. That potentially becomes a risk factor over time, as well as other kind of regulatory potential hiccups out there and geopolitical factors. But, that being said, we continue to believe that Apple remains just kind of a rock-solid story among a number of other companies that would potentially be more at risk to some of those factors out there.

- And that Apple ecosystem, that's a tough one to break, a lot of upside there, indeed. A big thank you there, Angelo Zino, CFRA Research senior equity analyst. Thank you for your time today.