When a stock moves to a $1 trillion valuation, it’s bound to leave some skeptics behind. I’ve been one of those skeptics toward Apple (NASDAQ:AAPL) — and obviously missed out on the long-term gains in AAPL stock.
Indeed, I detailed the bear case for AAPL on this site back in May. And though I’ve never shorted the stock — or necessarily thought it was significantly overvalued — parts of that case did ring true. Apple’s reliance on the iPhone (still about 60% of revenue) did present a risk — and still does. There were reasons why AAPL stock has, for years now, traded at a discount to the market as a whole — especially when backing out its impressive cash hoard.
The $1 trillion mark doesn’t necessarily erase those risks. But coming out of a strong fiscal third-quarter report late last month, it feels like there’s a noticeable change ahead for AAPL stock. Apple stock may finally become — for lack of a better term — just a normal stock. And in this market, in particular, that would seem to suggest that more good news is ahead.
Apple’s Cyclical History
Amid the fireworks of the $1 trillion number, it’s easy to forget that AAPL stock has not had a straight path to that historic level. In fact, over the last seven years, AAPL has had some serious peaks — and valleys. The stock nearly doubled in less than a year starting in late 2011. In less than a year, nearly all the gains were gone, amid a 40% decline. As recently as July 2016 — just 25 months ago — Apple still traded under $100 a share.
Underlying that volatility was the company’s product cycle. The iPhone 5 was launched in 2012; AAPL stock climbed into the launch, then started selling off. The stock recovered in 2014 before the iPhone 6 was released in September; once that optimism faded, Apple stock retreated again.
The correlation wasn’t necessarily one-to-one, to be sure. But skepticism — if not downright fear — about the inevitable “commoditization” of smartphones certainly seemed to rise when Apple didn’t have a new product directly in front of investors’ faces.
And — again — those fears had, and have, some validity. Some 60% of sales still come from the iPhone. And Apple is worth $1 trillion. A product that would move the share price of almost every other company on Earth — like, say, the Apple Watch — barely moves the needle here. There is no replacing the iPhone from a profit standpoint. Apple doesn’t have t0 be the next BlackBerry (NYSE:BB) for AAPL to struggle if that product starts to decline.
Is AAPL Stock Done Being Cyclical?
And so the most interesting question for AAPL stock at the moment is whether those cyclical gyrations are ending. Third-quarter results — and recent trading — seem to support the idea that they are.
As far as the iPhone goes, Apple has assuaged at least some of the concern with the iPhone X. A sharply higher ASP (average selling price) can offset lengthening replacement cycles (which can depress unit growth). A return to growth in China — which continued in Q3 — limits concerns about market saturation in North America. And the big sales of the X — which surprised a number of bearish analysts — suggest that “commoditization” at worst remains a long ways off.
Meanwhile, Apple is trying to minimize its dependence on the iPhone — and having some success. Investor and analyst attention increasingly is turning to the Services business. CEO Tim Cook reiterated a goal of $50 billion in category sales by 2020 — and those revenues come at huge margins, with sticky customers. Investors need only look at Netflix (NASDAQ:NFLX), Spotify Technology (NYSE:SPOT), or even Amazon.com (NASDAQ:AMZN) to see what revenue multiples the market assigns to those businesses.
There is much talk of late about valuing Apple as an “ecosystem.” If that holds, that sets AAPL stock up to move nicely past the current $1 trillion valuation.
Apple Becomes Normal
To be sure, I’m not 100% convinced Apple is out of the woods just yet. When the euphoria wears off from the X and recent solid earnings, investors may once again starting asking “What’s next?” — just as they did in 2012 and 2014.
But it seems equally likely — if not more likely — that Apple will become a “normal” stock. The endless worrying about launch dates and replacement cycles will end. And that’s almost certainly good news.
Somewhat incredibly, even at $1 trillion, Apple still is cheap on an earnings basis. As bulls have argued for years now, assigning AAPL stock even a market-average earnings multiple suggests huge upside. At the moment, AAPL stock would gain at least 20%, depending on how an investor calculated those multiples. There’s a clear path to that figure — if the market starts treating Apple like everyone else.
As of this writing, Vince Martin has no positions in any securities mentioned.