Apple - can this tech giant break into advertising?

Stock Of The Week: Apple

Can this tech giant break into advertising?

Another week, another tumble for US stocks. Even tech mammoths like Apple are being sold. Since the 30th March high, Apple shares have fallen by ~28%.

There’s no sign of the liquidity crunch abating either. Interest rates are higher globally, and the Fed started Quantitative Tightening this month too.

Perhaps, however, the so-called ‘quality’ companies like Apple could be favoured as share price discounts approach 30%... Apple’s cash pile totalled nearly $200 billion at the end of the last quarter and the firm generated almost $95 billion in profits for the last fiscal year…

Plenty of cash on hand but it’s tough to get too excited about that chart. Trading way below the 200 day moving average, and the 20 day sits a good $10 above Friday’s close. A recovery of the 20th May low at $132 would be a decent start for bulls, although it would be no surprise to see the 20 day cap any rallies in the short-term…

At least, in the absence of new catalysts. And there are a couple of areas that could help Apple increase their market position and diversify revenue streams.

First up, Apple announced their Buy Now, Pay Later offering. All lending will be handled by the company. No need to outsource to Klarna, Affirm, AfterPay or any other Buy Now Pay Later provider. 100% Apple Financing LLC. Which is probably a good use of that cash pile.

There’s also been talk of an Apple Hardware subscription program, which would allow users to ‘subscribe’ to phones, tablets and computers rather than simply subscribing to digital services. An in-house payment and credit system could certainly open the door to this too.

Then there’s advertising…
Lovely as it is to earn some extra interest and fees on lending, that’s probably not a game changer for Apple. J.P. Morgan analyst Samik Chatterjee thinks advertising could be…

He points out that:

"Global advertisement spends are increasingly moving towards digital mediums, and mobile advertisement is expected to grow from $288 bn in 2021 to over $400 bn by 2024."

Apple, with approximately one billion iPhone users worldwide, could be well-positioned to take advantage of any growth in mobile ad spend. A cynic might ask if this was the driving factor in their pivot towards user privacy and the option to block app tracking by third party apps such as Facebook last year.

Chatterjee believes that Apple could deliver incremental revenues of $6bn from advertising by 2025 and continue to grow those revenues "at a robust double-digit pace" from there on.

Nevertheless, this option might not entice investors in the current environment. If the projections of recession prove correct, advertising is something plenty of companies will cut back on. Indeed, many of the companies that drove the growth in mobile advertising might not make it if rates continue to rise.

Legendary short-seller Jim Chanos commented to Bloomberg that if loss-making food delivery companies couldn’t turn a profit during Covid, when “everything went their way”, there was a good chance they’d never become profitable, and in a higher rates environment, the business model may no longer be viable.Plenty of loss-making company revenues went straight back out in ad spend to drive ‘growth at all costs’.

Still, it’s yet another avenue for Apple to explore and potentially grow into, and with so much cash in the bank and a dominant market position, Apple could be a decent bellwether for the rest of the market.

Not investment advice. Past performance does not guarantee or predict future performance.