Here’s Why Apple Stock Will Stay In Rally Mode For The Rest Of 2019

The worst of the iPhone slowdown is over, and that means AAPL stock now has clear runway to $230

Shares of Apple (NASDAQ:AAPL) have popped in recent days after the technology giant reported second quarter numbers which easily topped expectations, included a strong guide, and broadly put to rest slowing growth concerns while reaffirming the thesis that the worst is over for this company. In response to the report, AAPL stock traded more than 5% higher to fresh 2019 highs.

Here's Why Apple Stock Will Stay In Rally Mode For The Rest Of 2019
Source: Shutterstock

Year-to-date, Apple stock is now up more than 35%. That’s a big rally for a stock of this size. But, the fundamentals and optics say that this rally isn’t over just yet.

In the big picture, Apple stock was killed in late 2018 amid concerns surrounding slowing iPhone growth. But, the big, scary iPhone slowdown now appears to be largely in the rear-view mirror. iPhone growth should come back into the picture in the back half of 2019. As it does, it will couple with still-robust Services and Wearables growth to produce very healthy revenue and profit growth numbers for Apple.

If all that does happen — and it increasingly appears that it will — then AAPL stock has upside to prices above $230 in 2019.

Right now, the stock trades just a hair above $210 with a 1.5%-plus yield. Meaning, return potential on AAPL over the next few months stills looks pretty good.

Strong Earnings Affirm That The Worst Is Over

In order to understand why Apple’s Q2 earnings report was good, it’s important to first understand the context of AAPL stock heading into the report.

Long story short, the world is nearing smartphone saturation. Pretty much everyone who wants a smartphone, already has one. Apple, which gets a majority of its revenue from the iPhone, has been gradually affected by this saturation for several quarters, evidenced, in part, by iPhone trade-in offers in the latest quarter.

But, in late 2018, that gradual impact became sharply negative as saturation headwinds combined with slowing economic expansion headwinds to cause a big drop in iPhone sales, especially in China. Apple stock dropped sharply in response.

In early 2019, Apple stock rebounded for a variety of reasons, but mostly because global economic conditions improved in the new year, giving hope to bulls that the worst of the late 2018 iPhone slowdown was in the rear-view mirror. Q2 numbers broadly confirmed this. Of utmost importance, iPhone growth rates improved dramatically as the quarter progressed, and the guide implies that the iPhone business should get back to growing next quarter. Apple stock popped big in response.

To be sure, Apple is still looking at a global marketplace that has reached smartphone saturation. But, smartphone saturation won’t kill the iPhone business. Instead, it will turn it into a stable year-over-year unit business with revenue upside through higher prices. Thus, in the absence of economic expansion headwinds, the iPhone business projects as a stable, low-revenue grower going forward. On top of still-robust growth from the Services and Wearables business, that means that the worst is over for Apple, and that low single-digit growth will be the norm going forward.

All of this is welcome news to investors, who were still questioning the underlying health of the iPhone business. Now, those questions have been answered favorably, and AAPL stock is moving higher.

Apple Stock Has Upside to $230

Given the long-term growth potential of Apple’s business, Apple stock has realistic and fundamentally supported upside to prices above $230 in 2019.

The math is simple. Apple’s iPhone business won’t grow by much on the unit front over the next several years. But, it should get a 0-2% boost from higher prices every year. Further, the Wearables business should continue to grow at a 20%-plus rate as smartwatches become more widely adopted around the globe, and the Services business should likewise continue to grow at a 20%-plus rate for the foreseeable future as Apple rolls out new services like TV+.

The iPhone still accounts for the lion’s share of Apple’s revenue. The Wearables and Services business are still pretty small in comparison. Apple going forward is one really big part slow growth, and two small parts fast growth. Ultimately, that combination should produce right around 3-5% revenue increases over the next several years.

Gross margins should improve as the iPhone business stabilizes and the Services business ramps. Opex rates should likewise stabilize as heavy investment spend is offset by operating leverage. Broadly, then, margins should be largely stable over the next several years. Big buybacks should persist, too.

Putting it all together, Apple projects as a 3-5% revenue grower with stable margins and huge buybacks over the next several years. Ultimately, I think that combination could drive EPS toward $20 by fiscal 2025. The market average multiple is 17x forward earnings. But, Apple has a little bit of growth in it now thanks to the Services business, and growth stocks normally trade at 21x forward earnings.

Thus, I think an 18x forward multiple is fair for this stock. Based on that forward multiple, a reasonable 2024 price target for Apple stock is $360. Discounted back by 9% per year (one point below 10% to account for the yield), that equates to a 2019 price target of just over $230.

Bottom Line on AAPL Stock

Strong Q2 earnings confirm that the worst is over for Apple, and that the rest of calendar 2019 should represent sequential improvement from early 2019. If things do play out as such, then Apple stock is on course for prices above $230 this year.

As of this writing, Luke Lango was long AAPL. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/05/heres-why-apple-stock-will-stay-in-rally-mode-for-the-rest-of-2019/.

©2020 InvestorPlace Media, LLC