Year after year, I read bear cases for why this is the year Apple (NASDAQ:AAPL) stock runs out of steam. The smartphone market is saturated. Apple’s revenue growth is slowing. There is no upside to Apple’s $1.37 trillion market cap.
I’m probably not even up to speed on what the Apple bears are saying in 2020. But whatever it is, Apple investors should expect more of the same from one of the top stocks and companies of the past two decades.
The company and the stock just keep right on chugging, including another 7.6% gain in 2020. Apple is no longer a potential home run, 10-bagger stock. But I believe Apple is the quintessential blue-chip stock to own for long-term investors in the 2020s.
Near-Term Outlook
AAPL stock is not immune to Covid-19 disruptions. Fortunately, Apple’s services revenue is mostly immune to disruption. At the same time, its upcoming iPhone 12 launch is the potential catalyst the company needs to get its business back on the right track.
Wedbush Securities analyst Daniel Ives estimates there are 350 million iPhone users around the world that have devices that have not been upgraded in at least 42 months. Given Apple’s impressive customer loyalty statistics, Ives says the vast majority of these iPhone users will upgrade sometime within the next two years.
Many AAPL stock bulls are optimistic that the company will release its first 5G iPhone in September. However, Ives is bullish on AAPL stock even if the 5G iPhone release is delayed.
“Our recent Asia checks and supply chain contacts are looking at iPhone units in the 165 million to 185 million range for CY20 with strong underlying momentum into CY21 on the heels of iPhone 12,” Ives says. “From a timing perspective, we continue to believe there are 4 models being discussed for iPhone 12 with a mix of 4G/5G that will likely be launched in the November/early December timeframe ahead of holiday season.”
Ives estimates Apple’s services segment alone is worth between $500 billion and $600 billion. The services segment also helped insulate AAPL stock from a worst-case novel coronavirus scenario.
Wedbush has a “buy” rating and $350 price target for AAPL stock.
Diversified Business Model
For years, Apple was considered a hardware company that relied on iPhone device sales to drive the top and bottom line. But this is not your father’s Apple. For the past several years, Apple committed to a pair of initiatives that helped diversify its business model.
The first change was increasing the company’s reliance on services revenue. No matter how successful Apple is in penetrating the global smartphone market, penetration is capped at 100%. In other words, even if everyone in the world eventually owns an iPhone, I can’t see a good reason for someone to own two iPhones.
But by pivoting to services revenue, there is no ceiling on the company’s potential growth. The average iPhone user could spend 99 cents per month on services. Or they could spend $9.99 or they could spend $99. As long as Apple keeps coming up with services people want and need, Apple’s revenue can keep growing. In the meantime, all iPhone users will still be forced to upgrade their phones every few years.
Argus analyst Jim Kelleher says Apple’s business has the ideal diversification for the current situation.
“Apple possesses multiple strengths to help carry it through this difficult period, including wearables (Air Pods), services (Apple Play), and a strong online business,” Kelleher says.
Kelleher also said Apple has expanded outside of the high-end smartphone market in recent years. It has extended its reach to new markets.
“The successful diversification of iPhone across multiple price points has broadened the available market and driven segment revenue growth,” Kelleher says.
Argus has a “buy” rating and $350 price target for AAPL stock.
How to Play AAPL Stock
Given the potential for Apple to grow its average revenue per user over time, the AAPL stock bull case is alive and well. At the same time, iPhone upgrades will continue to be a cash cow for Apple. If Apple can create similar hardware upgrade cycles with its wearable devices, that will be icing on the cake.
In the meantime, Apple has a massive cash stockpile. It will continue to return that cash to shareholders as it pushes toward its goal of becoming cash neutral over time.
Given the current macroeconomic circumstances, it’s hard to find a stock that has a similar combination of cash flow, capital return, attractive valuation and long-term growth opportunities. Apple may not have the explosive growth potential it used to. However, AAPL stock may be the best long-term blue-chip stock to buy in the market today.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.
