Apple Inc. (NASDAQ:AAPL) ought to release a reality TV show called “Everyone Loves Apple Stock.” When you have the support of Warren Buffet of Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) fame, you’re doing really well. And let’s be honest — AAPL stock is a freak of nature. Anyone who doubts this company and its dazzling rate of climb are eventually proven wrong.
It’s also a dangerous position to take if you’re thin-skinned.
Similar to the Russian government deploying troll propagandists — and no, this was well before Donald Trump — Apple stock is buoyed by ardent fans. Impugn the honor of AAPL, and you will be on the receiving end of a stern, albeit grammatically incorrect, lecture. Write anything less than positive about the company and you risk the outrage of the Apple Stasi.
Listen, I love AAPL stock just like the next guy. For my on-the-go digitalization needs, I exclusively use Apple products. More importantly, the company knows how to organically integrate their multiple businesses under a cohesive umbrella. This is an area that companies like Sony Corp (ADR) (NYSE:SNE) have attempted with mixed results.
So I completely get the bullish argument of Apple stock. But just how high can AAPL go?
Is Apple Stock the Next Trillion Dollar Investment?
InvestorPlace contributor Chris Lau laid out a comprehensive thesis for why Apple stock could hit $189. At that price, assuming no other fundamental changes, AAPL stock would have a market capitalization of $1 trillion. Or, as the President might say, Apple could assume 5% of the U.S. national debt.
As Lau states, the target is well within the realm of possibility. First, enthusiasm is sky-high for the company’s 10th anniversary iPhone release. Just for the historical milestone, the new iPhone should perform remarkably. Also, the Samsung Electronic (OTCMKTS:SSNLF) fiasco with its imploding devices is a boost for Apple stock. Call it the schadenfreude effect, if you will.
Wall Street analysts are certainly willing to play ball. Many have raised their price targets for AAPL stock to within a more reasonable range to $1 trillion. This sentiment is aided by the fact that the Chinese smartphone market is in flux. Its local competitors have duked it out for top position. But given the aforementioned iPhone milestone, it’s conceivable that Apple can once again be competitive in China.
This sets up a lucrative long trade for Apple stock. After all, to hit the trillion mark, AAPL will need to gain another 36%. That’s serious growth, so long as the horizontal axis known as time is short enough.
Competition Is Much Harder for AAPL
I don’t doubt that Apple stock will hit $189, and eventually breach the $200-mark. I’d say that’s a no-brainer assumption. So far this decade, AAPL stock is averaging remarkable annual returns of 23%. And year-to-date, shares are up more than 20%, and we’ve got plenty of 2017 left! This is literally the data of inevitability.
But one thing that concerns me is the ebb and flow cycle of Apple stock. Shares tend to get ahead of themselves, only to crash back down to earth. It’s a pretty volatile ride, and that may or may not be everyone’s cup of tea. Furthermore, while this decade has been great, it pales in comparison to the 2000s, when AAPL averaged 53.5% returns. Different era, different trade, I get it, but still — don’t expect shares to hit a trillion all at once.
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Over the past ten years, revenue growth is almost 30%. But in the last four years, that has dropped to 9%. At the same time, debt has skyrocketed from under $17 billion to over $75 billion. In order to improve sales by 26%, debt had to increase by 344%.
Sure, there are multiple factors involved in liabilities calculations. But one thing you can say unequivocally is that AAPL is sweating bullets to make incremental improvements. Ultimately, that’s not a confidence booster for Apple stock.
I Like AAPL, But Just Be Careful
I don’t have a crystal ball as to when AAPL stock will hit its magical mark. I do wholeheartedly agree with Lau in that it largely hinges on the new iPhone. If sales are record-shattering, it’s game over for Apple bears and the competition.
But if it’s something less than stellar, question marks will arise. There’s always the possibility that the enthusiasm has already been priced in. Recent flat trading in Apple stock confirms this idea. But the bottom line for me is the workload.
Apple is cranking like mad to stay on top of their game. That tells me that the game has become much more intense and challenging. So I’m cautious of buying into strength. Let it cool off a bit, then reengage the trillion dollar idea.
As of this writing, Josh Enomoto was long SNE.
