How Far Can Apple Inc. (AAPL) Stock Really Go With the Cloud?

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Apple Inc. (NASDAQ:AAPL) just might be the Donald Trump of the technology sector. Like “The Donald,” AAPL stock has soared in both market value and perception through decades of success. Just as well, Apple has had its fair share of controversy — think child labor and the aura of imperialism. Nevertheless, you can’t keep a good thing down. AAPL stock is on a resurgence, but how far can it really go?

No doubt, many investors are getting frustrated with the tease.

After posting a robust 43% return in 2014, Apple stock floundered the following year. Its 2% annual loss was the first since the global financial crisis of 2008.

This year, AAPL stock is up 11% and building momentum. Since trading in the weeds during the late spring to early summer, Apple finds itself up over 25%. The raw numbers are certainly impressive. But convincing new buyers to take a bite out of AAPL stock will take some work.

The Bullish Case for Apple Stock

Let’s examine the bullish argument. First and foremost, the fundamentals are very positive. In the third quarter of fiscal year 2016, the tech giant posted an earnings per share of $1.42.

This was a notable win as AAPL posted an uncharacteristic miss in the prior Q2. Equally significant, if not more so, was its revenue haul of $42.4 billion, which exceeded consensus estimates. That put the naysayers to rest, and set up the framework for what we see now in Apple stock.

But the “big league” issue of course is the cloud. Two weeks ago, AAPL announced that the separate divisions operating cloud and internet services would be physically merged to its Cupertino headquarters. The move is part of a broader effort to remain “cloud competitive” with the likes of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN). In response, AAPL stock ticked up almost 1%.

The strategic refocusing is a critical one. Cloud computing is already big business. In 2012, cloud traffic measured 259 exabytes — that’s the equivalent of one billion gigabytes. Put another way, one exabyte can store “50,000 years’ worth of DVD-quality video.” Even more mind-boggling, by the end of next year, cloud traffic is predicted to register 1,800 exabytes.

Clearly, losing in the cloud means losing the tech war altogether, something that AAPL stock can’t afford.

AAPL No Longer Has a “Free Ride”

However, the journey will not be easy, or even mildly challenging. Amazon by far has the biggest cloud infrastructure, with a market share of 31%. The next closest competitor, Microsoft Corporation (NASDAQ:MSFT), is at a very distant 9%. Stalwart International Business Machines Corp. (NYSE:IBM) is next, followed by Google. The point isn’t just about the number of competitors, but the enormous quality among them. Cloud computing will take over the world, and the future of AAPL stock — no matter how great it is now — will depend on management’s actions today.

But merely making inroads into the cloud will not be a panacea. Apple has got to keep its main bread-and-butter — the iPhone — ahead of the pack. That dynamic will be put in the spotlight now that Google has unveiled what they hope to be an iPhone killer.

The Pixel and Pixel XL represents a bold, completely in-house innovation. Featuring a next-generation camera, and the first to use Android’s Nougat 7.1 operating system, the Pixel will be generating waves.

Whether it actually impacts iPhone sales remains to be seen. What it does show is that companies are no longer afraid to take on Apple head-to-head. That might make AAPL stock investors a little uneasy, as they’ve enjoyed a long period of unfettered dominance.

AAPL Stock Has Changed

Still, a betting man will stick with the company that Steve Jobs built. It will take something quite miraculous to unseat Apple from its throne. That’s one of the reasons why “The Oracle” gave AAPL stock a vote of confidence a few months ago.

AAPL stock, Apple stock
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Source: Source: JYE Financial, unless otherwise indicated

It’s just that the nature of investing in Apple stock has changed, and quite dramatically. In the 1990s, the average share price on an adjusted basis was $1.25. In the 2000s, the average was a dime short of $8, or an increase of 532%.

Over the last seven years, AAPL stock has traded for around $75, or an 853% jump over the prior decade. There’s no way that such explosive growth can last.

The argument forwarded by InvestorPlace contributor Charles Sizemore makes the most sense. AAPL stock has “evolved into a value stock.” Its enormous cash hoard, combined with further strengths in the balance sheet and a predictable business model makes it an ideal candidate for a retirement portfolio.

Of course, there will be years where AAPL bursts into the limelight. But for the most part, Apple is a reliable veteran that’s best suited for a designated hitter slot.

That should by no means discourage investment in AAPL stock. The company is making all the right moves and adjusting well to a changing industry. This is simply a matter of managed expectations. Apple stock will move higher from here, but don’t expect fireworks. Stability comes with a cost against growth, and AAPL is no different. Understanding that point will keep all parties happy.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2016/10/apple-inc-aapl-stock-far-cloud/.

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