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Apple’s key competitive advantage is ‘in its large and still growing user base’: Analyst

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KeyBanc Analyst Brandon Nispel joins Yahoo Finance Live to share the firm's evaluations of Apple's price target and outlook in addition to weighing in on the iPhone developer's innovations and ventures into other industries.

Video transcript

- Let's take a look at shares of Apple 11 minutes into the trading day on this Tuesday. Shares at almost $170. It's been swinging quite a lot along with all the other tech stocks through the last week of Trading so let's bring in Brandon Nispel, he's an analyst at KeyBanc. And he has a $191 price target on the stock. And Brandon, it's great to have you on the program. I was taking a look at your note, and you say that it's not necessarily about the Ts and market cap for the stock, but about the Bs in terms of active installed iPhones. Tell us a little bit more about why the hardware still remains a story for Apple.

BRANDON NISPEL: Yeah, I mean, as we look at Apple, we think the key competitive advantage for the company is really in its large and still growing user base, particularly on the iPhone side. And we think that user base really fuels Apple's competitive advantage in that its ecosystem continues to grow and it becomes very important for the longer term story.

- Brandon, it's Julie here. That said of course, the company is still quite reliant on iPhones for now, even though we've seen the mix shift to some extent. And I'm curious what you make of some of the recent reports about the sort of supply chain difficulties that even Apple is having and maybe some of its customers are waiting to order their next iPhone, because they don't think they can get one. Is that something that's a concern for you?

BRANDON NISPEL: You know, as we look at it, again, it's still all about the user base. And coming off of fiscal 2021, where Apple had record revenues and grew its iPhone revenue base by 39%, we think growth can continue. And frankly, with some of the supply chain disruptions, I think that just points to results that could have been even better.

You know, and all of that suggests that demand for the iPhone is still really strong. And again, it's really driven by the active user base. And we think the user base continues to grow, you know, at call it 7%, which on a base of a billion, that that's really key. And we're right at the point where you know, we're at the start of the 5G upgrade cycle. So consumers all over the world are going to be upgrading their handsets to get the latest and greatest technology.

- Brandon, as you're modeling out the future earnings power potential for an Apple, how big a business is an Apple car business, and what exactly is that business?

BRANDON NISPEL: You know, Apple car specifically is not something that we've included in our estimates. We like to be able to touch and feel, at least see a product before coming to a conclusion on how to value it. I think when you think about Apple though, what-- what they do really well is they combine software, hardware, and services all in one consumer product. And they aim at targeting markets that are very, very large market. So a car makes a lot of sense.

And again, we keep going back to the user base. Because of Apple's user base that's still growing, they have fanatic customers, right? And so that user base is going to most likely purchase any product that Apple comes out with.

- How important are certain markets, and I'm talking specifically about China, because your note also kind of points to the fact that about what the share of iOS adoption is 19% in China. That's a massive market for them and one I imagine they can even grow further. How instrumental is that market for their growth story as you kind of figure out these price targets?

BRANDON NISPEL: Yeah, absolutely. I mean, China was Apple's fastest growing market last year. And their market share is still really low compared-- comparatively, if you look at iOS market share in the US, which is closer to 55%, and in Japan, it's closer to 70%. so at a mid-teens market share, we think there's a lot of potential upside for Apple. And that'll come over time with, I think, growing affluency in some other emerging markets, right? Apple prices its products as a premium. And as consumers in international markets continue to become more affluent, we think Apple's products become more adopted.

- And on the services front, I want to ask about the regulatory and also kind of litigation risk here, because we've seen the fights that just play out over the last two years or so over the App Store and you know, the rights that certain app providers and certain software providers on the iOS platform have. And this is obviously a spat that's gotten them in trouble with Google, it's gotten them in trouble with advertisers, especially with changes to the privacy rules on the iOS platform. How important does that kind of represent either regulatory downside risk in your future projections as well?

BRANDON NISPEL: You know, we would expect more regulation. I think what we've seen over the last couple of years is Apple makes small concessions really to appease everybody. It's sort of a bend, don't break type of strategy. But what really creates Apple's competitive advantage with the services business is its user base, right? Its user base is critical for developers to reach their customers. Developers need Apple to be able to distribute their applications, and thus, with a user base that's growing, that's what really creates the competitive advantage.

So going forward, we'd expect some know some modest-- more regulation and some concessions by Apple. But we still project the services business to grow close to $100 billion in the next three years, which is a 14% kegger, which to us is pretty remarkable when we look at the size of that business.

- All right, Brandon Nispel, an analyst at KeyBanc again with $191 price target on Apple. Thanks again for stopping by Yahoo Finance this morning.

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