Shares of Apple (NASDAQ:AAPL) are up 40% year-to-date compared to the Invesco QQQ ETF (NASDAQ:QQQ) which is up 23% and the SPDR S&P 500 ETF (NYSEARCA:SPY) which is up 19.3%.
With a large run up in the stock this year, the logical question for investors to ask is how much more upside there is in the short term and the intermediate term?
The answer to that question can be found by looking at the prospects of the iPhone upgrade cycle, the future pace of share repurchases and the current dividend yield.
iPhone Upgrade Cycle
The next generation of iPhones is on sale and according to analysts, there appears to be strong demand for the iPhone 11, which carries a price tag of $699. One of the major selling points is a better camera and the fact the iPhone 11 comes with a price tag that is $50 lower than the $749 price tag of last year’s iPhone XR. CNBC reported that JPMorgan estimates 184 million iPhone shipments in 2019 and 195 million shipments in 2020. If the estimates for 2020 are correct, the increase in iPhone shipments should help cover the likely lower margins because of the $50 lower selling price and increased costs from tariffs throughout the iPhone supply chain.
The one caveat to strong demand for the latest versions of the iPhone is what consumers are thinking about a 5G iPhone that will likely come out next year. I do not see a large number of people holding out another year for the 5G iPhone since there are a limited number of areas that currently have 5G. I expect that people who upgrade now — along with other consumers — will hold out to upgrade in 2021 when a second-generation 5G iPhone will likely be released. By then 5G will be much more prevalent.
Apple Stock and Share Repurchases
Share repurchases have increased substantially since the beginning of 2018 in comparison to 2017 and 2016. Since Q1 2016, cash has essentially been flat, while at the same time debt is substantially rising. In my opinion, the indicator of how much more share repurchases Apple will conduct can be found in its net cash. Over the last four years, the year-over-year change in net cash balance has declined by an average of $30.5 billion.
When I modeled for that rate of decline to continue, the data shows investors should not be worried about a large-scale slowdown in share repurchases until the end of 2022.
Dividend Yield
One indicator of whether the current rally will continue is the dividend yield. The following chart shows the dividend yield is low based on data from the last year and a half. The last time the dividend yield was this low was in May 2019, and shares of Apple subsequently had a large selloff. The chart shows when the dividend yield is in the 1.2%-1.4% range, shares of Apple have tended to pull back from whatever level they were trading at.
Bottom Line on AAPL Stock
The bottom line for Apple is that in the short term, I am expecting a pullback. But over the next three years I see Apple continuing to repurchase a large amount of stock and continue increasing its dividend. Another indicator that points to limited upside for the remainder of the year is the fact that each of the last two years, the high close for Apple has been in Q4.
Shares of Apple are already trading near the high of the year for 2019. So, I expect limited upside for the remainder of the year, a pullback at the end of 2019 or beginning of 2020, and then a subsequent run up in the stock leading to new all-time highs sometime in 2020.
As of this writing, Brad Kenagy did not hold a position in any of the aforementioned securities.
