Shares of Apple (NASDAQ:AAPL) have been on the mend, as investors lap up the latest iPhone release and new products. Two consecutive earnings reports that were better than expected help the bull case as well. Going into the fourth quarter, is Apple stock a good buy?
Over the past few days, Apple has received several analyst notes and price targets. The latest came from Piper Jaffray. Analyst Michael Olsen has a buy rating and a $243 price target. He and Katy Huberty are some of the more accurate Apple analysts out there.
Luckily, Huberty spoke up recently as well. On Sept. 20 she assigned a $247 price target to go along with her buy rating. Merrill Lynch analyst Wamsi Mohan also used September 20th to publish his note with a buy rating and $250 price target.
Not everyone is bulled up though, as evidenced by Jun Zhang of Rosenblatt Securities. On September 23rd, he set a sell rating and $150 price target, implying about 32% downside.
Of the three price targets above from the bulls, it implies about 10.6% upside.
iPhones and New Services
Of course, much excitement has been made over Apple’s new iPhone, streaming service in Apple TV+ and its Apple Arcade subscription services. At just $4.99 per month per family for each (barring a free one-year trial for new product purchase), both Apple TV+ and Apple Arcade are wildly affordable.
And that’s exactly the point. It’s Apple’s latest offering aimed at generating excess revenue for its Services division.
Services isn’t just important for Apple because it’s clocking in at more than $10 billion in quarterly sales, but also because it has wide margins. Further, it’s a critical point in turning the Apple stock story into one of software and services from consumer hardware. In doing so, the hope is that it will boost the stock’s valuation.
However, to keep that Services engine alive and kicking relies on more than just a boost in customer spending. Apple needs to give its customers a reason to spend more. Getting them into low-cost monthly subscription is a pretty solid start, particularly when they have hundreds of millions of active users.
Apple TV+ and Apple Arcade will join Apple News (at $9.99 per month) and Apple Music (at $9.99 per month or $14.99 per month per family) in the Services offering lineup. When done at an enormous scale, these seemingly innocuous recurring revenue streams add up to billions per year, as evidenced by Apple’s Services revenue growth over the past few years.
Now they have something for everyone, the music listener, the reader, the gamer, the streamer and perhaps most importantly, the kids.
Trading Apple Stock
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The question then becomes, will investors care and can the stock get to $250?
The answer to the first question is a lay-up yes. The company has already built a well-oiled machine. As much as onlookers would like to complain about the evolutionary progress of the iPhone vs. any revolutionary steps, there’s only so much one can do to a smartphone.
A better screen, improved cameras, longer battery life and faster chips are the annual expectations. And for a company like Apple that pulls in billions each year on it, that’s fine by most investors.
As for $250 a share question, it’s more a “when” rather than “if” question.
Above is a daily chart of AAPL stock, while below is a weekly. On the top chart, one can clearly see the negative post-earnings reactions to Apple stock. That’s an unfair assessment, though.
In each of the last two quarters, Apple has beat expectations and provided a better-than-expected outlook. The initial rallies were immediately met with sellers though because trade-war tensions flared up unexpectedly. In other words, bad luck foiled two of Apple’s most recent post-earnings runs. Worse, the stock suffered double-digit drawdowns — one of more than 20% — as a result.
Fast forward to earlier this month and Apple stock finally broke out over $215. That level now becomes a key support level on future declines. Below it means Apple needs more time to consolidate. Over this month’s high, currently at $226.42, and Apple can attempt a run at its all-time high near $233.
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Interestingly, Apple stock is setting up in a longer term ascending triangle pattern. The ascending triangle occurs when a rising level of support (purple line) squeezes a stock against a static level of resistance (black line).
Should Apple stock breakout over resistance, it will set the stage for a run to $250 and likely beyond if the broader market is rallying as well.
On the downside, recognize that Apple isn’t immune to huge pullbacks. In 2018, AAPL stock price fell 40% down to its 200-week moving average. Each time, these deep corrections have been outstanding buying opportunities. Keep that in mind next time CNBC is airing “Markets in Turmoil” or the perma-bears are screaming that Apple is finally doomed.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL.
