On June 3, Apple (NASDAQ:AAPL) stock touched an intra-day low of $170.27. A little over five months later, the Apple stock price closed at $264.47 — a 55% increase.
It’s worth putting those gains in context. Over that stretch, Apple stock has added roughly $420 billion in market capitalization. There are six companies in the entire world — six — with a greater market value than AAPL stock has added in just 164 days.
Unsurprisingly, no stock ever has had a run like that. Only one company has ever come close, and it had much more help. And so the obvious question must be: Has the run gone too far? I’d tend to believe it has, but like every other skeptic, I’ve admittedly been wrong on Apple stock so far.
A Historic Run for the Apple Stock Price
No company of Apple’s value — over $700 billion even at those early June lows — ever has posted such a steep gain in such a short time. Of course, few companies have ever been worth $700 billion. Apple was the first company to clear that level back in early 2015. Only Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) have joined it.
The only one to come close to the recent run in AAPL is Microsoft, which Apple passed recently to become the world’s most valuable company. MSFT stock has added roughly $400 billion in market value from December lows. But it took Microsoft stock nearly twice as long to add slightly less in market capitalization, and that company had some help.
After all, broad markets were plunging last December and since have rallied. The 57% bounce in MSFT stock from those lows has come amid a 37% rally in the Nasdaq Composite. The 55% gain in Apple stock since early June has come against just a 16% increase in that tech-heavy index. Nearly two-thirds of the run has come just since Aug. 23, during a period in which the Nasdaq has gained less than 10% while AAPL stock has risen 31%.
What’s Really Changed?
What’s interesting about the run, too, is that not all that much seems to have changed. Admittedly earnings for both the fiscal third and fourth quarters came in ahead of expectations. But neither report looks all that impressive on its face. In Q4, for instance, sales grew just 1.8% year-over-year — and operating income declined 3%.
Nor did investors react all that strongly to either release. The Apple stock price rose 2% after the third-quarter release in July — and promptly declined 9% over the next three sessions. Q4 results sparked a two-session, 5%-plus increase that only accounts for a small portion of the torrid post-June run.
Indeed, the gains have come despite the fact that the bull and bear cases for Apple stock don’t seem all that different than they did six months ago.
Have Bears Backed off AAPL Stock?
The core bear case for Apple stock, as I detailed last year, has centered on the iPhone. That product generated 62% of revenue in fiscal 2017 and fiscal 2018. Longer replacement cycles and eventually, competition from cheaper but almost-as-good rivals threatened its long-term viability.
AAPL stock as a result seemed to rise and fall with iPhone product cycles, with optimism toward the stock often peaking ahead of a launch and fading soon after. Without a new iPhone to attract investor attention, it seemed, fears of declines in revenue and profits took center stage.
Fiscal 2019 results hardly seem to offset that case. iPhone revenue declined 14% year-over-year, according to figures from Apple’s U.S. Securities and Exchange Commission Form 10-K. Product gross margin declined 2.2 points to 32.2%, driven by lower iPhone sales and the stronger dollar. That followed a 130 basis point compression in FY18, which in turn suggests unsurprisingly that the iPhone is Apple’s most profitable hardware product.
Due mostly to that iPhone weakness, operating profit declined nearly 10% in fiscal 2019. It’s grown just 4.2% total in the last two years. Fundamentally, many Apple skeptics might argue that the results over the last two years support the bear case, despite the rising Apple share price.
The Case for Apple Stock
Of course, investors should look forward, not backward, and AAPL bulls would argue that’s exactly what they’re doing. The bull case for Apple is that the company’s growing services business can not only offset iPhone pressure, but drive consolidated growth.
And that case, too, has been supported by recent results. Services revenue increased 16% in FY19 to over $46 billion. And those revenues are much more profitable: Gross margins of 63.7% are nearly double those of Apple products. Services drove almost exactly 30% of gross profit dollars for Apple last year, a figure that should continue to rise going forward.
Meanwhile, hardware isn’t dead, either. Apple’s iPad sales had declined for years, but rose 16% thanks to the iPad Pro. Wearables, Home and Accessories sales, driven by the Apple Watch, jumped 41%, with the category outpacing the iPad and nearing the $25 billion in Mac revenue.
So if the iPhone can even keep revenue stable or close, Apple still can grow profits at a nice clip. Services growth will help margins. Non-iPhone hardware sales increased 17% in fiscal 2019. And AAPL stock is cheap enough in that scenario to potentially keep moving higher. FY21 earnings per share estimates near $15 suggest a forward multiple under 18x, and closer to 16x backing out the company’s net cash hoard of nearly $100 billion.
Obviously, many investors have come around to that bull case, and have fueled the breakout in AAPL stock. That said, one wonders if the rally has gone far enough — or too far. Apple stock now trades above the average Wall Street price target. Hardware concerns may re-emerge. Tariffs are a factor. And the company still is less than a year removed from its “biggest miss in years,” when the company slashed guidance for Q1 FY19.
But none of those risks have mattered so far. And perhaps they won’t going forward. Even after this historic run, there’s still a bull case for AAPL stock, and likely many fewer bears out there to argue against it.
As of this writing, Vince Martin has no positions in any securities mentioned.