At the beginning of 2019, things weren’t looking too hot for global technology giant Apple (NASDAQ:AAPL). The company had just cut its revenue outlook for the first time in essentially 20 years, as new iPhone models weren’t selling well, demand in the all-important China market was slowing significantly, the company found itself at the epicenter of an escalating U.S.-China trade war, and macroeconomic recession chatter dominated market headlines. Times have changed in a big way since then for AAPL stock.
In early October, the Apple stock price notched a new record-high close over $236, marking a year-to-date gain of 50%, as well as a 60% increase from the early January lows.
What’s behind the huge 2019 turnaround in AAPL stock? Two things. One, it has become abundantly clear since early 2019 that Apple doesn’t need a red-hot hardware business to grow. The Services business is big enough and has enough firepower to offset hardware sluggishness, and keep Apple’s revenues and profits on an uptrend. Two, the hardware business — which was supposed to be sluggish for the foreseeable future — has come back to life in a big way recently amid stronger-than-expected demand for the new low-priced iPhone 11.
Together, these two catalysts have sparked a huge turnaround in Apple stock from multi-year-lows at the beginning of 2019, to all-time-highs in late 2019.
What’s next? More upside. The valuation on AAPL stock appears full-up here. But, it’s appropriately maxed-out considering the company’s recent momentum, and shares should continue to grind higher as this momentum persists for the next few quarters.
Digging Deeper Into Services and Hardware
Is there more to that continued Services strength and renewed Hardware enthusiasm? You know there is.
On the Services front, there were concerns earlier in the year that the Services growth narrative would flatten out as the hardware business stopped growing. That didn’t happen. Instead, Apple has discovered and pursued multiple pathways to monetize its huge ecosystem of iOS users. These pathways don’t require install base growth to work. They just require that the current install base buy into new services, like Apple Music … and they are.
As such, the Services business has maintained red-hot growth throughout 2019. This continued strength has offset any hardware weakness. As it has, investors have taken an increasingly optimistic outlook with respect to Apple’s long-term growth trajectory sans robust hardware growth.
On the hardware front, pretty much everyone had resigned to the idea that Apple’s iPhone business was all dried up. That is, after a few unsuccessful new iPhone launches in a row, investors and analysts didn’t have high expectations for this year’s iPhone 11 launch. But, the iPhone 11 launch has actually gone very well — and it’s almost all due to the fact that Apple priced the entry-level iPhone 11 at just $700, a steep discount from the thousand-dollar price tags on previous new phones.
The implication? Apple’s iPhone business struggled simply because its phones were too pricey to compel most consumers to upgrade. Now that Cupertino has cut the upgrade price, though, consumers are upgrading in droves. That’s a positive sign, which strongly implies that so long as Apple keeps its prices low, it will continue to sell a bunch of phones.
The 2 Big Reasons Shares Can Go Higher
There are also two big reasons why Apple stock can go higher from here — the Services growth narrative is about to get a big boost, while there is reportedly a super-low-price iPhone in the pipeline that should launch in 2020.
Apple’s Services business has been on fire for a long time. Yet, it’s biggest catalyst hasn’t arrived yet. That is, Apple TV+, the company’s streaming TV service, which could have tens of millions of users one day and provide a huge long-term boost to the Services revenue growth trajectory, doesn’t launch until November 1. Over the next several quarters, Apple TV+ will likely add millions of new subscribers. As it does, investors will grow more and more optimistic about the long-term potential of the Services business, and that will lead to higher prices for AAPL stock.
Meanwhile, the hardware business should get a big boost in 2020. Noted Apple analyst Ming-Ching Kuo — who has correctly predicted multiple product releases before — is saying that a new iPhone SE2 is set to launch in 2020 with a majorly discounted $400 price tag.
Remember how the iPhone 11 is selling super well because it’s a relatively cheap new smartphone? The iPhone SE2 will be a new smartphone with a price tag that is about half that of the iPhone 11. The implication? Renewed strength in the hardware business should persist over the next few quarters, and this renewed strength should also help push AAPL stock higher.
Bottom Line on AAPL Stock
In a nutshell, Apple stock was supposed to be supported by robust Services growth and weighed down by sluggish hardware growth. But, recent developments imply that both businesses will fire on all cylinders for the next few quarters. Apple stock wasn’t priced for this. Consequently, if both of these businesses do fire on all cylinders over the next few quarters, Apple stock will rally and make new all-time-highs.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
