The bull move in Apple (NASDAQ:AAPL) stock has been impressive. Just a year ago, the prospects for the company looked far from promising. The company had fumbled with various products, was lagging in China and its iPhone models seemed lackluster.
But of course, the problems were temporary. While CEO Tim Cook does not have the charisma or product genius of the late Steve Jobs, he still is a capable leader. During the past few years, he has pulled off a highly successful transition towards services – which was not an easy feat.
The latest quarter certainly points to the payoff. The company reported revenues in the services unit of $12.7 billion, up 17% on a year-over-year basis. There was broad-based strength across the iCloud, music, payments, Apple Care and the app store.
Here are a few highlights:
- Apple News, which is a personalized app, is now getting over 100 million MAUs (Monthly Active Users) in the U.S., U.K., Australia and Canada.
- Apple TV+ continues to bolster its content, with actors like Jennifer Aniston and Billy Crudup.
- Apple Pay is growing at a robust pace. The current annual run-rate is 15 billion transactions.
The wearables business, which includes Apple Watch and AirPods, is also showing much traction. As Cook noted in the earnings call, the revenues are at a level for a Fortune 150 company.
And of course, there is the iPhone. Its growth has been the biggest surprise, with revenues rising 8% to $56 billion.
The Issues
It’s hard to find problems with Apple stock right now. Yet I think investors should still have some caution.
One of the nagging issues is that most of the catalysts already seem to be factored into Apple stock. Let’s face it, what else may positively surprise Wall Street? Well, it’s difficult to find anything.
Note that the current valuation is certainly pricey. The earnings multiple is currently about 25.5X. Granted, many other mega-tech companies are fetching higher valuations. For example, Microsoft (NASDAQ:MSFT) is at 31X and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is at 29X. But then again, on a historical basis, Apple stock has tended to trade at a multiple of 11X to 13X.
But valuation is not the only problem. For example, the potential impact of the coronavirus in unclear. On the earnings call, Apple senior vice president and CFO Luca Maestri had this to say: “We expect revenue to be between $63 billion and $67 billion. The wider-than-usual revenue range comprehends uncertainty related to the recently unfolding public health situation in China.”
The biggest risk is the damage to the supply chain as Apple still relies heavily on China. Factories in China are expected to remain closed until Feb. 10, but this is far from certain. And even if they are allowed to be open, it could still be a major challenge to find enough workers to gear up for production. There could also be difficulties in sourcing for supplies and components.
To get a sense of what’s happening in China, look at Tesla (NASDAQ:TSLA). An executive for the company said yesterday that there will be production delays because of the coronavirus. On the news, Tesla shares plunged 17% (although, this has come after a parabolic surge).
Bottom Line On Apple Stock
All this is not somehow to imply that Apple is vulnerable to a big fall. All in all, the company is on solid footing. But given that the valuation is already rich and expectations are quite optimistic, there could be more risk on the downside.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
