Just when it looked like the run may be over, shares of Apple (NASDAQ:AAPL) found their groove. Apple stock ended July at $190 and a month later was at $230. The 40 point gain gave AAPL a one-month return of more than 21%, causing many investors, me included, to expect a pullback.
Once shares fell below and failed to get back above the 20-day moving average, a date with lower prices seemed inevitable. But Apple wanted to play hard to get, and it succeeded as shares climbed back up the ladder. The stock almost hit new highs on Monday, before backing off those levels later in the session.
But it proposes an interesting question as we head into October: Should we buy Apple stock heading into the fourth quarter?
In a sense, yes.
An Apple Holiday
Apple’s latest product intro ended up being a sell-the-news event in September, although not by too much. We saw a new host of iPhones in the lineup and the impressive Apple Watch Series 4. The continual creep higher in prices may turn some customers off, but by and large, most are going to gobble up the iPhones, Watch and other Apple products this holiday season.
It likely will drive Apple to another record calendar fourth quarter (fiscal first quarter). The most expensive iPhone this year was the iPhone X and conveniently, it was also the best-selling unit in the lineup. This drove average selling prices (ASPs) substantially higher and helped give a boost to margins.
With a strong economy and a lineup even more expensive this year despite the price bump customers saw last year, expect big-time numbers from Apple come January.
Valuing Apple Stock
iPhones aren’t the only thing driving Apple stock. As Apple’s ecosystem continues to grow, so too does it Services revenue, specifically Apple Music.
Even with SiriusXM (NASDAQ:SIRI) teaming up with Pandora (NYSE:P) and while Spotify (NYSE:SPOT) striving to be the king of streaming music, Apple isn’t messing around.
In fact, CEO Tim Cook recently said Apple Music has more paying subs than Spotify in North America and Japan already. Look for that number to continue growing.
Last quarter, Services revenue grew a whopping 31% year-over-year (YoY) to $9.55 billion. Unlike the rest of Apple’s business, this unit does not suffer much from seasonality as it continues to build momentum.
The total came in well ahead of the $9.2 billion estimate and its high margins only add to the bottom line. Management soon expects Services to get to the $10 billion per quarter mark, representing annual sales of $40 billion.
High-margin, high-growth Services revenue companies with rising iPhone ASPs and the rest of Apple’s business make it a titan among consumer product companies. While shares have been on fire this year (up 47.5% over the past 12 months) they trade at a reasonable 19 times this year’s earnings and 16.5 times next year’s earnings.
Admittedly, that’s a bit rich for Apple stock, historically speaking. But tell me this company isn’t worth a premium, particularly with its rock-solid balance sheet and reliable dividend. Its $100 billion buyback this year allows it to retire several percent of its outstanding share count each quarter. Do you realize how much buying power that is?
Trading Apple Stock
Click to Enlarge
Above is a three-month chart of AAPL. Maybe long-term investors don’t care about the charts, but there’s a good lesson here for those interested in learning.
After bumping up against and failing at the $230 level, Apple stock began to retreat. Initially the 20-day moving average was support, but Apple followed up its bounce by putting in a lower high. That allowed a short-term downtrend to form (blue line).
Take a look at Sept. 17, the beginning of the blue box on the chart. It shows where the 20-day failed as support. For the ensuing seven sessions, Apple failed to get above this mark, despite numerous attempts. However, on the eighth day (purple arrow) AAPL gapped above both the 20-day and downtrend resistance.
That quickly sent shares back to $230 and now we’re seeing momentum turn favorably for the bulls via the MACD (blue circle, bottom on the chart).
So what now? On the downside, look for the 20-day moving average and the backside of Apple’s prior downtrend line to act as support. On the upside, look to see if Apple stock can breakout over $230.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long AAPL.
