After rising from $150 last January to over $300 today, what’s next for Apple (NASDAQ:AAPL) stock? Previously, the valuation of AAPL stock was much lower than that of its FAANG peers. But now the valuation of Apple stock is catching up. Yet it can climb further.
If holiday season iPhone 11 sales at least meet expectations, Apple’s upcoming earnings, due to be released on Jan. 28, could move Apple stock higher.
But that’s not all! There are other catalysts that can move the needle for Apple stock in 2020. Beyond iPhones, Apple’s growing services business, along with new streaming initiatives, could send the shares higher.
While its valuation is higher than before, AAPL stock still trades at a lower forward earnings multiple than its “big tech” peers. With this in mind, let’s dive in and see why Apple stock could reach new highs in 2020.
Products and Services Could Move the Needle for AAPL Stock in 2020
Wedbush analyst Daniel Ives’ recent research note pointed to multiple factors that could move Apple stock higher this year. Ives called holiday season sales of the iPhone 11 “robust,” indicating that there was strong demand for the device last quarter. But demand for the new iPhone model could extend into 2020. And there are rumors that 5G-enabled iPhone models will be launched in September.
While it’s not set in stone that 2020 will bring a 5G iPhone, such an event could create a “super cycle” upgrade opportunity. About 350 million out of 925 million iPhones worldwide could be discarded in favor of a new iPhone. In other words, the iPhone could set sales records this year.
But AAPL stock has other positive catalysts. Apple’s AirPods have also been a tremendous success. An estimated 65 million AirPods were sold in 2019. Ives estimates that more than 90 million could be sold this year.
Services is another area that could boost AAPL stock. Apple’s Services business generated $12.5 billion of sales in the quarter that ended on Sept. 28. With services now reaching $50 billion-plus of annual revenue, Ives estimates Apple’s services alone are worth between $500 billion and $650 billion.
As Apple further monetizes its services, they are set to become a bigger driver of AAPL stock. By further expanding its video streaming offerings, AAPL could grow its services further. In his research note, Ives also discussed how Apple is betting big on streaming, increasing its original content budget six times. He estimated that the subscriber base for Apple’s streaming business could reach 100 million within three years. AAPL could also beef up its content offerings by acquiring a Hollywood studio like Lions Gate Entertainment (NYSE:LGF-A LGF-B), Sony’s (NYSE:SNE) studio business, or MGM (OTCMKTS:MGMB).
Will Apple Stock Benefit From Multiple Expansion?
As indicated by the information above, Ives, the Wedbush analyst, is highly bullish on AAPL stock. Rating AAPL stock “outperform,” the analyst has a $400 price target on Apple stock. Could Apple climb another 30% by the end of the year? AAPL stock may not reach that level, but it can climb above its current level. Based on analysts’ average earnings per share estimate of $13.09 for this fiscal year, which ends in September, Apple’s forward price-earnings ratio stands at 22.8.
Let’s compare that to the other FAANG stocks. Apple’s forward non-GAAP P/E is getting close to that of Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG GOOGL). Facebook trades at 25.2 times the average forward earnings estimate. Alphabet stands at 28.6 times the average forward earnings estimate. Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) trade at higher forward P/Es, but they may not be as comparable to AAPL. Microsoft (NASDAQ:MSFT), which could now be called an “honorary FAANG component,” is a better comp. MSFT trades for 29.2 times the average forward earnings estimate.
However, AAPL stock has historically traded around 15 times the average forward earnings estimate. Some analysts are skeptical as to whether Apple’s revenue growth justifies a FAANG or Microsoft-level valuation. But analysts, on average, expect Apple’s average EPS growth between FY20 and FY21 to be 13.5%. That is roughly the same as the average estimate for Microsoft’s EPS growth during its upcoming fiscal year.
With that in mind, further multiple expansion by AAPL stock is justified. With estimated earnings of $14.86 in FY21, even expanding the forward multiple to 25 could move the shares up to $371.50. That’s a roughly 20% bump from the current price of Apple stock of around $308.
With the continued growth of Apple’s services business, along with strong demand for new iPhones, Wall Street is more willing to give AAPL stock a higher valuation. Even if the forward multiple only moves up to 25, the shares could generate a nice return in the coming year.
Gains Are Priced In, But Apple Could Move Higher in 2020
Don’t expect AAPL stock to perform as well in 2020 as it did in 2019. Much of the improvement of the company’s results is already priced into the shares. Investors are very well aware of the company’s upcoming catalysts. That explains why Apple’s forward earnings multiple is getting close to that of Alphabet, Facebook, and Microsoft.
AAPL stock could easily be trading 20% higher by the end of the year. But be careful about buying. It now The shares may fall in the short-term if the Jan. 28 earnings release fails to meet expectations. Tread carefully, but consider buying Apple stock in 2020.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
