After Apple (NASDAQ:AAPL) stock earned a Wedbush price target of $400, analyst Dan Ives’ $2 trillion valuation seems not entirely far-fetched. The stock already rose by over 100% in the last year, so another $100 added to its share price could be inevitable.

Source: pio3 / Shutterstock.com

For Apple stock to reach the $400 level, the company needs exceptionally strong demand growth for its iPhone devices. The company is already there — as the latest quarterly results indicate. And the 5G refresh cycle, which is already underway with Apple’s competitors, must drive more device upgrades.

Before predicting the sales strength on a product that is not out yet, investors should start by breaking down Apple’s quarterly earnings report posted on Jan. 28.

Exceptionally Strong First-Quarter Results

Apple reported revenue growing an impressive 9% from last year. This is an all-time record and is in stark contrast with last year’s worries. Previously, Apple removed iPhone unit sales numbers from its quarterly report. In doing so, it forced analysts and the markets to consider its other revenue numbers.

Not only did iPhone sales of $56 billion exceed the $51.4 billion consensus estimate, but Apple also sold almost $6 billion worth of iPads, $7.2 billion Macs and $10 billion worth of wearables and home accessories. Services revenue was $12.7 billion. The company highlighted in its press release that it returned $25 billion to shareholders in the first quarter. Stock buybacks worth $20 billion and $3.5 billion in dividend payments are in line with rewarding shareholders.

Outlook for Q2

Apple forecast revenue between $63 billion and $67 billion and gross margins between 38% and 39%. The wider range is due to the company forecasting the potential impact of the coronavirus on the business. For example, if retail traffic falls sharply as those in China stay inside and avoid travel, it may hurt Apple’s production rate. In Q1, it had over 480 million paid subscriptions. So, Apple will soon exceed its 500 million target set for the March quarter.

Getting to the new target of 600 million subscribers by the end of this year is inevitable. Apple Store revenue grew in the double-digit range in Q1. And as third-party subscriptions take off, the company should expect another year of strong services revenue.

The beauty of Apple’s forecast including the risks of the virus in China is that it has mitigation plans in place. This will make up for any production loss. Still, if Apple reopens its factories after Chinese New Year on Feb. 10, output should reach expected levels.

Apple TV+ and 5G Are Not Yet Meaningful

Given that Apple is still in the early phases of the Apple TV+ launch, the service is not adding meaningfully to revenue just yet. But as it counts more paid subscribers, Apple TV+ bundle subscribers and free subscribers, the larger audience will attract more talent and original content.

Recently, analysts speculated that an iPhone 5G refresh cycle would drive sales even higher. But on its conference call, an analyst asked how Apple would price 5G models. The analyst asked:

“There is a general view that when 5G phones come out they’re going to be more expensive due to higher component costs, but at the same time, it looks like you guys have proven that there is a market for low cost geographies to phones like iPhone SE. So, how do you see these two different segments within the smartphone market evolving over the next one to three years?

CEO Tim Cook responded by saying he will not comment on future products. Instead, he hinted at a 5G product in Apple’s product roadmap. But he said he would not comment on the pricing of something that is not yet announced.

Valuation and My Takeaway on Apple Stock

Investors may forecast Apple growing revenue in the mid-single digits for the next five years. In a discounted cash flow model: earnings before interest, tax, depreciation and amortization (EBITDA) exit, assume the following:

Source: finbox.io (click on the link to change assumptions)

Apple stock has a fair value of roughly $343. Plus, add an iPhone 5G refresh and strong demand for Apple TV+ and the price target goes up. Similarly, Stock Rover is equally bullish, giving Apple stock an overall score of 84. This is broken down as follows:

Source: Stock Rover

Investors should continue holding Apple for the long term. The company is demonstrating strong growth that might pick up in pace.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.