Last year’s 84% surge in Apple (NASDAQ:AAPL) shares was a surprise, even for many of Wall Street’s biggest bulls. By comparison, the S&P 500 was up 30% and the Dow Jones Industrial Average clocked an increase of 22%. Apple’s gain was on par with the best-performing tech IPO for the year, Zoom Video Communications (NASDAQ:ZM).
Now the market cap for the tech giant stands at $1.3 trillion. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), on the other hand, is at $923 billion and Microsoft (NASDAQ:MSFT) trades at $1.2 trillion. By the way, Apple had a much better year-to-date performance than both of these companies.
“The qualities of companies that are likely to thrive have a business model that stands the test of time,” said Robert R. Johnson, Professor of Finance at the Heider College of Business at Creighton University, in an email interview with InvestorPlace.com. “That is, firms with durable competitive advantages. Warren Buffett refers to these as economic moats — using imagery from the Middle Ages. Apple is an example of a stock with multiple moats relating to network effects, intangible assets (its brand name), and switching costs.”
This analysis is certainly spot on. But for 2019, Apple also benefited from some major catalysts. There was, for example, the easing of monetary policy from the Federal Reserve. This not only pumped more liquidity into the system — in which a large amount went into equities — but also helped to stabilize the economy. Next, there was the thawing of the U.S.-China trade war. CEO Tim Cook was also savvy in how he found ways to navigate the tricky politics.
In terms of the fundamentals of the business, Apple has been successful in transitioning to services, such as with Apple Pay, iTunes, iCloud, Apple Music and so on. This has provided for more growth opportunities as well as recurring revenues. Consider that services represent about 18% of the top line.
And yes, the wearables business continues to be solid. In the latest quarter, the revenues jumped by 54%, primarily because of the demand for Airpods and the Apple Watch. Note that these products are still in the early stages in terms of market penetration. According to Morgan Stanley analyst Katy Huberty: “Considering 3 of every 4 Apple Watch customers are new to the device, expect a long growth runway going forward.”
Yet the biggest catalyst for Apple is still likely to be the iPhone. True, the past year has seen depressed sales but this is likely to reverse. For the most part, if existing owners of older models want to better take advantage of the new iOS 13 functions and services, there will need to be upgrades. Besides, the iPhone 11 has compelling features, such as with the displays, sophisticated cameras and zoom lenses.
Finally, next year Apple plans to launch its iPhones for the rollout of 5G networks. This is likely to spark even more demand because of the significant increases in speed. Dan Ives, who is an analyst with Wedbush, believes that 5G will bolster the “supercycle” for the stock price. To this end, he raised his target from $279 to $350.
Bottom Line on Apple
A repeat performance for Apple in 2020 is unrealistic. However, the valuation is still reasonable, with the forward price-to-earnings ratio of 19.5. This is at a discount to other large tech operators like MSFT, GOOGL and Amazon (NASDAQ:AMZN).
In other words, there is still room for upside — and even multiple expansion. What’s more, if the markets get much more volatile, which could easily be the case as the Presidential election will be a wild card, Apple stock may represent a safe haven. According to Loop Ventures’ Gene Munster: “Over the next year, we believe investors will gain confidence in applying a more services-like multiple to AAPL given the hardware business (iPhone and wearables) will deliver revenue visibility similar to traditional services businesses.”
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.
