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The iPhone XR Makes Apple Stock a Great Buy Again

Apple stock looks due for a big end-of-year rally thanks to strong iPhone XR demand

By Luke Lango, InvestorPlace Contributor

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The iPhone X never delivered on the “Super Cycle” many Apple (NASDAQ:AAPL) analysts were hoping for. But, all those Apple stock analysts calling for an iPhone Super Cycle last year weren’t wrong.

They were just a year early. At its recent annual launch event, AAPL just unveiled three new iPhones. The most interesting of three is the iPhone XR, which has all the bells and whistles of the iPhone X that consumers care about. The critical difference? The iPhone X debuted at an unprecedented $1,000 price point. The iPhone XR will sell for $749.

The investment takeaway?

Buy Apple stock because the iPhone XR will be a huge hit. The iPhone X is a great phone. But, it didn’t do well on the units front because of its huge $1,000 price point. To most consumers, the iPhone XR is simply the iPhone X at a deep discount. Thus, the iPhone XR takes the one big reason why consumers didn’t buy the X, and removes it. In so doing, the XR is setting up to be one of Apple’s most successful phones ever.

Meanwhile, the economy is healthy. The consumer is strong. The markets have maintained a solid uptrend. Apple’s services business is on fire. Other hardware products got some nice upgrades. And, Apple stock is still the cheapest name in the widely watched FAANNG group.

In other words, Apple stock looks good here. The AAPL stock price can and will head higher into the end of the year.

The iPhone XR Will Be Huge for Apple Stock

Last year, everyone on Wall Street was hyping up the iPhone X, saying it was going to spark an unprecedented Super Cycle in iPhone upgrades. But, I warned against that thesis, and said that while the phone sparked mass consumer interest, the $1,000 price point was just too high to turn that mass consumer interest into mass consumer action.

As it turns, the Super Cycle never happened. Most people just stuck with their old phones, and the iPhone X was largely written off as a flop from a demand standpoint. High ASPs help offset weak demand, and the iPhone X still made a bunch of money. But, it wasn’t the Super Cycle that Wall Street was looking for.

I don’t think Wall Street was wrong about the Super Cycle. They were just a year early.

People didn’t buy the iPhone X because it was too pricey. But, the iPhone XR offers many of the mainstream features of the iPhone X, like edge-to-edge display, face recognition, and a high-powered processor, at a fraction of the price.

As such, while I think a lot of people waited on the sidelines last year when it came to iPhone upgrades, I also think that all those people who did wait will rush to upgrade this year to the more reasonably priced iPhone XR. After all, edge-to-edge display is the new mega-trend in smartphones, and now that the trend is a year old, smartphones that aren’t edge-to-edge display are starting to feel a bit antiquated.

Plus, consumers who didn’t upgrade last year now have phones that aren’t edge-to-edge display and are two years or more old. At around two years old, your smartphone starts to feel old, almost too old. Thus, you could get a lot of people upgrading from the iPhone 7 and older models to the iPhone XR.

For all these reasons, I think the iPhone XR will be met with huge demand. That huge demand is coming at a time when consumer confidence is at all-time highs, retail sales are surging and the economy is vigorous. Thus, it seems like Apple stock is positioned for a huge holiday season.

AAPL Stock Will Win

A huge holiday season for iPhones isn’t the only thing stock in Apple has going for it.

Historically speaking, the AAPL stock price tends to do fairly well after iPhone launch events. There have been twelve iPhone launch events since 2007. Nine of those twelve launches sparked a multi-month rally in Apple stock. During those nine rallies, the average gain in Apple stock over the subsequent sixty days was 7%. A 7% gain this time around would imply a price target for Apple stock of $240 by mid-November.

Also, the core thesis of AAPL going from a hardware company to a software and hardware company remains as strong as ever. The Services business, which exists to monetize the huge hardware user base through various subscription and software services, remains red-hot and is growing at a 30%-plus clip. Huge growth in this business is pushing margins higher, and Apple’s overall profitability profile continues to improve. So long as this transition plays out smoothly, Apple stock should remain strong.

Last, but not least, Apple stock trades at just 19X forward earnings. While that isn’t a small multiple (the market-average multiple is around 17X), it also isn’t that big. Considering revenue growth was nearly 20% last quarter and profit growth was 40%, a 19X multiple seems rather conservative. Also, Apple is often thrown into the big tech FAANNG group, and in that group, Apple stock is the cheapest.

All together, Apple doesn’t just have a big upcoming holiday season going for it. It also has history on its side, a secular software growth narrative that is progressing nicely, and a compelling valuation that looks anemic relative to peers. Put all that together, and it is easy to see why Apple stock can head higher into the end of the year.

Bottom Line on AAPL

The iPhone XR will be huge. History says Apple stock tends to do well after iPhone launch events. The Services business continues to provide a strong secular growth narrative. And, the valuation on AAPL stock looks compelling.

There are many reasons to buy and own Apple stock here. The more reasons to buy a stock, the stronger the bull thesis, and the more likely it is that the stock heads higher.

As of this writing, Luke Lango was long AAPL. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/09/the-iphone-xr-makes-apple-stock-a-great-buy-again/.

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