Apple Stock Will Keep Climbing

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Global technology giant Apple (NASDAQ:AAPL) closed out the last decade with a bang. In 2019, Apple stock rose about 86%, marking its best annual performance since 2009, as the company’s struggling hardware business rebounded and its red-hot software business stayed red hot.

There Aren't Enough Headwinds to Stop Apple Stock

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After such a great year, though, AAPL stock must be ready to take a breather, right? Surely, Apple stock can’t have another blockbuster year in 2020, after having its best year in a decade in 2019.

Wrong.

History suggests that AAPL stock can keep climbing. After Apple rose nearly 150% in 2009, it gained another 50% in 2010.

The fundamentals also indicate that Apple stock can keep climbing. In 2020, Apple’s software and hardware businesses will both only get stronger, and the company’s revenue and profit trends will only improve.

The numbers also suggest that being bearish on AAPL stock is the wrong call. There’s some significant re-rating going on as Apple becomes a more software-heavy company, and my numbers indicate that this re-rating will drive Apple stock well above $300 over the next 12 months.

Don’t count out Apple stock in 2020 just because 2019 was really good. In reality, AAPL could have a huge 2020, too.

History Says 2020 Could Be Good

A quick look back at the history of Apple stock indicates that 2020 could be yet another great year for AAPL.

AAPL stock rarely has just one big year.  Instead, Apple stock usually rattles off multiple big years in a row. After 2009’s 150% rally, Apple rose another 50% in 2010. Before that, on the heels of a 200% rally in 2004, the shares rose another 100% in 2005. And, before that, Apple rose 150% in 1999 after a 210% surge in 1998.

Thus, while it may seem natural to assume that Apple stock is due for a breather after an 85% rally in 2019, history would suggest otherwise.

Apple’s Fundamentals Are Improving

More importantly, the fundamentals supporting Apple stock are improving and will continue to improve throughout 2020.

For the first time ever, Apple’s software and hardware businesses will both be on fire in 2020. On the hardware side, there are murmurs around Wall Street that Apple’s AirPods and smartwatches have been huge hits this holiday season. It’s unlikely that the surge of demand for Apple’s wearables products will die down in 2020. Instead, it’s far more likely that demand for those products will continue to jump as long as consumer spending remains healthy.

At the same time, the iPhone SE2 will launch in early 2020. The launch of this low-priced iPhone — with a rumored base price pf $399 — will  tremendously increase Apple’s smartphone sales in price-sensitive international markets. Later in 2020, Apple will launch its first ever 5G iPhone, and there will naturally be huge demand for that device.

At the same time, Apple’s software business will only get bigger and stronger. Apple’s biggest software initiatives so far, Apple TV+ and Apple Arcade, just launched. They will have their first full year in 2020, and during that year, both of those platforms will dramatically expand their content and user bases. As they do, Apple’s already red-hot software business will get even hotter and the revenue, margin, and profit trends of the business will continue to improve.

All of Apple will fire on all cylinders throughout 2020. As a result, AAPL stock will likely continue to head higher.

A Look at the Numbers

It’s easy to look at Apple’s forward earnings multiple of 22, see that it’s markedly above the five-year-average forward multiple of 15, and call the stock dramatically overvalued. But that’s an oversimplified analysis of what is going on.

Over the past five years, Apple has been a technology hardware company with lumpy sales cycles, choppy and relatively low profit margins, and high capital expenditures. But the Apple of today is not the Apple of the past five years. Instead, the Apple of today is partly a technology hardware company with lumpy sales and choppy margins and partly a software company with annually recurring sales, stable and high profit margins, and low capital expenditures.

It’s the inclusion of the software component that justifies a higher multiple for Apple stock. Indeed, while the forward earnings multiple of AAPL over the last five years is just 15, the information technology sector’s average forward earnings multiple is 21. Consequently, Apple stock doesn’t seem so overvalued even though it’s trading at 22 times its forward earnings. So, rather than becoming expensive, Apple stock is simply becoming more appropriately valued, considering its growing software business.

Over the long-term, if Apple sustains 2%-4% revenue growth over the next few years and its margins continue to expand thanks to its higher software revenues, then my modeling suggests that Apple’s earnings per share could reach about $22 by 2025. Based on a forward earnings multiple of 21, which is average for the IT sector, and a 10% annual discount rate, that equates to a 2020 price target for Apple stock of about $315.

The Bottom Line on AAPL Stock

One thing is crystal clear: Apple stock is a long-term winner. That means investors should only really sell AAPL when it looks like things are about to take a turn for the worse. In 2020, they won’t.

Instead, in 2020 things will only get better for AAPL, thanks to its new iPhones, a big 5G push, the expansion of Apple TV+ and Arcade, and sustained wearables growth.

As a result, Apple stock will continue to rise.

As of this writing, Luke Lango was long AAPL.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/apple-stock-will-keep-climbing/.

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