During the current holiday quarter, smartphone sales will probably perform well. Consumers who delayed upgrading their devices may wait no longer. Those on the Apple (NASDAQ:AAPL) iOS platform are even more inclined to buy the latest iPhone 11. That is because those on iPhone 6, 7 and perhaps the iPhone 8 will find the iPhone 11’s features compelling. The surge in sales could send Apple stock higher.
Android users do not have the same urgency in updating their devices. Samsung and the other leading Android suppliers refreshed devices enough each year to encourage consumer upgrades. Plus, the latest iPhone might even encourage Android users to come back to the iOS platform. All of these trends suggest that record iPhone 11 sales are all but assured.
Apple stock, which trades at close to $280 is still in value territory at a forward P/E of around 19 times. When it reports results in late January, AAPL stock could head into the $300 territory following strong iPhone 11 sales, its stock still trades at value levels.
iPhone 11 a Worthwhile Upgrade
Apple fans have two big reasons to upgrade to the latest iPhone. First, Apple vastly improved the hardware. The iPhone 11 has a 5.8-inch display, dual 12MP ultra-wide and wide cameras, and 2 times zoom lens. The iPhone 11 Pro has a triple camera system and a 6.1-inch display. The 11 Pro Max is the biggest with a 6.5-inch display.
iOS 13 is the second reason Apple users will want to upgrade to the latest device. Although older devices support the latest operating system, users get the best performance when the system is running on the newest hardware.
iPhone Sales Momentum
In Q4/2019, Apple reported iPhone revenue of $33 billion. This is a 9% decline from last year but an improvement from the 15% drop in the previous three quarters.
Services revenue grew 18% year-on-year to $12.5 billion. So, even if the current user base does not rush out to upgrade, the older devices can still handle Apps, Apple TV+, and Apple’s cloud services. With strong services revenue ahead, Apple will reach its goal of doubling the fiscal year 2016 services revenue in 2020.
Apple Pay continues to generate record revenue from payment services. Apple Pay revenue and transactions more than doubled from last year to 3 billion transactions in the last quarter alone. On a valuation comparison, PayPal (NASDAQ:PYPL) enjoys a forward P/E of 31 times while Square (NYSE:SQ) is valued at higher multiples. Visa (NYSE:V) trades at 26 times forward P/E.
What if Apple Pay’s market share grows at the expense of Visa, PayPal and others? Should Apple stock not trade above the 19 times forward P/E?
Markets will likely value Apple stock at lower multiples than credit services companies. The company is a diversified business that depends on hardware, services, and payment processing. Shareholders will just have to hold the stock for the long-term. The gains will come slowly and steadily over the next few quarters.
Valuation on Apple Stock
Apple stock trades above the analyst consensus price target of $264. In the month ahead, Apple will need to drive iPhone sales higher. As its user base on the iOS 13 platform grows, so too will its services revenue.
A revenue and earnings beat in the next quarterly earnings report will follow with analysts upgrading their price target on Apple stock.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
