It’s not often that the outlook for a stock improves dramatically in a week’s time without an earnings report. But Apple (NASDAQ: AAPL) stock investors have a lot more to smile about today than they did just a week ago. Early feedback on iPhone 11 sales has been mostly positive. And Apple made an underrated chess move to mitigate its trade war risk.
AAPL stock price is up 6.7% in the past month. But with its business booming, fewer near-term question marks ahead and a still-reasonable valuation, there are plenty of things to love about Apple stock.
Strong Start For iPhone 11
Early reports on the iPhone 11 have been bullish for AAPL stock. Year after year, Apple skeptics talk trash about how the new iPhone model is lackluster. They say demand is peaking, renewal cycles are growing and competition is rising. Yet Apple always seems to silence the critics, and this year may be no exception.
Wedbush analyst Daniel Ives said lines at the Apple flagship store in New York were about 70% the length of a year ago on iPhone 11 release day. In addition, Ives said preorder demand in China is extremely impressive.
“The base model iPhone 11 currently we estimate is seeing pre-order activity in the all-important
China region that is roughly double from a year ago with XR as it appears the lower price points, dual camera functionality, and added colors is hitting the sweet spot for consumers that have been waiting to upgrade,” Ives told clients.
The analyst estimates there are between 60 million and 70 million iPhone users in China due for an upgrade. These preorder numbers suggest those users may be in play in the next two quarters. But perhaps most importantly, those preorder numbers suggest Chinese users are not turning their back on Apple due to the trade war.
Austin Mac Pro Production a Savvy Move
The other piece of news that flew under the radar this past week was Apple’s decision to build its Mac Pro in Austin, Texas. It’s likely no coincidence that Apple made the Austin announcement just days after securing trade war tariff exemptions for most of its products.
“In our opinion this is an example of smart and strategic balanced production from Apple and should be viewed as a move in good faith as we head into the December 15th possibility of the additional 10% tariff on the $300 billion of Chinese goods,” Ives wrote.
As trade war tensions have escalated, the fact that Apple produces its cash cow iPhones in China has been a major overhang for the stock. Ives estimated it would take Apple five years to shift just half of iPhone production elsewhere. So far, Apple has done an excellent job navigating the turbulent trade war waters. It seems Apple is still on favorable ground with both the U.S. government and Chinese consumers. The Austin news is just the latest example of the political savvy of Tim Cook and Apple leadership.
How to Play AAPL Stock Now
AAPL stock is trading at a forward PE of 17.2 with projected third-quarter revenue growth of -0.2%. I wouldn’t say it’s a screaming buy, but there are plenty of reasons to love Apple. Numbers out of China suggest things aren’t as bad as feared. Monetization of existing iPhone customers is generating high-margin Services revenue. Apple’s installed base of users hit an all-time high this year.
Apple has $210 billion in cash and recently approved a $75 billion buyback program. It pays a 1.4% dividend, which it has consistently raised.
Of course, the trade war remains a risk and Apple will have to continue to execute in rolling out its devices. In the meantime, the next near-term risk that could rattle the market is antitrust regulation. Apple’s App Store is likely to be the target of antitrust scrutiny in coming quarters, according to Ives. However, he predicts antitrust fines are much more likely than a breakup. Apple has plenty of cash and cash flow to manage fines. In fact, what it pays out in fines could easily be offset by a relief rally in the stock once antitrust worries are off the table.
At this point, AAPL stock has become a modern-day blue chip American company. Returns likely won’t knock your socks off in the near-term. But I see Apple continuing to deliver long-term upside for investors for years to come.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
