Shares of Apple (NASDAQ:AAPL) are on the comeback. Back in late 2018, amid a broader market sell-off and slowing iPhone sales, Apple stock dropped nearly 40% off all time highs in just three months.
Ever since, though, broader financial markets have stabilized and investors have realized that Apple doesn’t need robust iPhone unit growth to be a healthy company. Apple stock has consequently rebounded strongly, rising 30% off its early January lows.
Now, AAPL is rapidly closing in on its 200-day moving average, implying that things are back to normal for the stock. Does that mean the best of this turnaround rally is over? Or is there more runway left?
A bit of both. The best in the turnaround rally does appear to be over. The present valuation implies you won’t get another 30% rally in APPL over the next two months. But, this rally isn’t over just yet.
The fundamentals, powered by high-margin growth in Apple’s Services business, imply that this stock has runway to $200 in 2019.
As such, while the best of the Apple stock turnaround rally has already happened, this rally isn’t over yet, either. The stock still has another 10%-plus upside left in 2019. Coupled with a 1.6% dividend yield, that makes the return profile on Apple stock look pretty good at $180.
Don’t Expect Another 30% Rally
Apple has come very far, very fast in 2019, and investors shouldn’t expect this pace of gains to be replicated in the future.
AAPL rallied 30% in two months. That is one of the largest and fastest rallies this stock has staged over the past decade. Importantly, the rally has been so big and happened so quickly, that further upside appears to be limited.
Namely, Apple stock now trades at a 16 forward earnings multiple. Historically, this stock trades around 13.5-times forward earnings. Plus, the current yield on Apple is 1.6%, and that’s below average (1.7%). Meanwhile, the backdrop remains sluggish global economic growth and muted smartphone unit growth.
To be sure, the stock was able to rally against that backdrop in early 2019 because the forward multiple was below-average (12) and the yield was above-average (2%). But, that’s no longer the case today. You have an above-average valuation and a below-average yield on a stock that’s still struggling to cope with peak iPhone.
It’s also worth mentioning that the Relative Strength Index (RSI) on Apple recently jumped into overbought territory.
In other words, a relatively stretched valuation and overbought conditions prohibit Apple stock from rallying another 30% over the next two months, meaning that the best of the Apple turnaround has already come and gone. But, the entire rally isn’t over, either.
Upside to $200 Is Doable
The fundamentals underlying Apple stock are favorable and imply healthy near and long term upside in the stock.
In a nutshell, Apple doesn’t need robust iPhone unit growth to keep its business on an upward trajectory. Sure, the volume of people buying new iPhones every year isn’t going up. But, very few people are switching out of the iPhone ecosystem, meaning that iPhone unit growth should remain stable while iPhone revenue growth should be positive thanks to price hikes.
More important, a very large and stable iPhone install base gives Apple an enormous opportunity to monetize that install base through various software services, like Apple Music, App Store, and a soon-to-be-announced Apple streaming service.
The sum of all those services will provide Apple with a large chunk of subscription-based, high-margin revenue flow, which will ultimately impact Apple’s financials by boosting revenue growth, providing more revenue stability, pulling up margins, and supercharging profit growth.
All four of those financial impacts are positive stock price drivers. As such, AAPL should continue to rally over the next several years thanks to super-charged Services growth.
How much can Apple rally? Quite a bit. Revenue growth through 2025 should run around the low to mid single digit range. Margins should trend higher thanks to higher iPhone ASPs and bigger contributions from the Services segment. Buybacks will continue at a healthy pace. All together, profits should grow at a steady high single to low double digit rate for the foreseeable future.
That would put fiscal 2025 EPS around $19. Based on a market average 16 forward multiple, that equates to a 2024 price target for Apple of over $300. Discounted back by 8.5% per year (below my 10% discount rate to account for the yield), that equates to a 2019 price target of just over $200.
Bottom Line on Apple Stock
Apple is a long term winner that will stay on a winning trajectory thanks to expansion of its Services business. But, the stock has come very far, very fast in 2019, and this pace of gains going forward is unsustainable. As such, investors should expect the stock to cool off some, but remain on an overall upward trajectory.
As of this writing, Luke Lango was long AAPL.