Everything is going right for Apple Inc. (NASDAQ:AAPL), and AAPL stock is trading at all-time highs.
The iPhone maker reported very strong numbers for the September quarter. Management also delivered a better-than-expected guide for the holiday quarter.
The strong results are being driven by broad-based strength across the whole business. IPhone sales are on fire and the company is selling about as many phones as ever. IPad sales continue to inflect upward. Same with Mac sales. Apple’s higher-margin services business continues to outperform expectations.
Meanwhile, the Apple Watch continues to experience robust growth and dominate the smartwatch market. The cash pile continues to balloon. And the iPhone X launched globally on Friday to hugely positive response. Lines at Apple stores around the world are about as long as they’ve been since the first iPhone launch a decade ago.
Now, the murmurs of a “first trillion dollar company” are becoming much louder. A trillion dollar valuation is a feat no public company has ever achieved. But with Apple’s market cap having ballooned to just under $900 billion and AAPL stock trading at just 18.4 times trailing earnings, the prospects of this company soon being worth a trillion dollars is very realistic.
Will Apple stock get there?
Many think so. But I take the contrarian view here. AAPL stock feels like too much of a good thing right now.
Can The iPhone X Really Live Up To Expectations?
There are a lot of good things about the Apple growth narrative right now.
It’s a positive to see iPad sales making a comeback and retaking market share from 2-in-1 devices. It is also a positive to see the same thing happening with Mac sales. The Apple Watch has posted unit growth of over 50% for 3 consecutive quarters.
This device has a big growth runway ahead as the smartwatch market continues to grow. The services business is scaling nicely, and that is huge because it leads to bigger profit margins.
But make no mistake. Apple stock is an iPhone-driven growth story. The iPhone accounted for 55% of Apple’s revenue last quarter.
AAPL stock, then, has been bid up on huge expectations for the iPhone X.
Those expectations are reasonable. We haven’t had a big upgrade cycle in a few years. The iPhone X does offer a significant “step up” from prior models. Long lines on the global launch date imply early demand is strong.
But Apple is also trading at its richest valuation in five years. The only other time AAPL stock was this richly valued over the past five years was in late 2014/early 2015 when investors were bidding up the stock on huge iPhone 6 expectations.
The iPhone 6 was a huge hit, and AAPL stock kept climbing higher in early 2015. But shares started to crumble in mid-2015 as the market realized the huge demand for the iPhone 6 was a one-time thing. The success was not repeatable. Earnings estimates came down. The valuation fell. And AAPL stock tumbled from $130 to $90 in a year.
Apple finds itself in a similar situation here. Big valuation. Big expectations. A seemingly unstoppable growth narrative. The stock trading at fresh all-time highs.
The similarities to 2015 are too strong.
Shares of the iPhone-maker will likely trend up over the next several months as iPhone X demand ramps up and the growth story remains strong. But that growth story will start to fade in 2018. And so will AAPL shares.
Bottom Line on AAPL Stock
Apple is a great company firing on all cylinders right now. The valuation remains ostensibly reasonable and early indicators of iPhone X demand are exceptionally bullish.
But the similarities to 2014/2015 with the hugely successful iPhone 6 launch are too strong.
That means that while AAPL stock may trend up over the next several months, the stock does not look good for 2018. Maybe I’m being unnecessarily contrarian, but if you take a look at this chart, you’ll understand why.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
