Shares of global technology giant Apple (NASDAQ:AAPL) have come very far, very fast over the past year and change. At the start of 2019, this was a $155 stock. Today, a little over a year later, Apple stock trades hands at roughly $320, more than double its early 2019 price.
That’s a huge jump for a company that big. To put it into perspective, Apple has added $650 billion to its market cap over the past year. Facebook (NASDAQ:FB) — the world’s sixth largest company — has a market cap of $640 billion. So, in about a year, Apple essentially added a Facebook-worth of value to its market cap.
Naturally, some investors think this record rally in Apple stock has come too far, too fast. But, has it?
I don’t think so. Over the past few years, Apple has mastered the art of what Ari Ginsberg, Professor of Entrepreneurship and Management at NYU’s Stern School of Business, calls “incremental innovation,” as opposed to “disruptive innovation.”
“Under the leadership of Steve Jobs, Apple became a famous tech company for harnessing its disruptive innovations to [drive] explosive performance, particularly [in] its iPhone and iPad products,” says Ginsberg. “In contrast, under the leadership of Tim Cook it has become a stable, market-leading company that now continuously adds incremental innovations to their current product lines.”
Given that, the reason to stick with Apple stock on this record rally goes something like this.
In 2020, a bunch of these incremental innovations will converge. As they do, Apple’s software and hardware businesses will fire on all cylinders together for the first time ever. Revenue and profit trends will materially improve. And Apple stock will march higher, especially considering that its valuation still isn’t that full.
Apple Has Mastered Incremental Innovation
There are a lot of pundits out there who have knocked Cook and Apple for not spearheading any new disruptive innovation over the past few years. According to them, this lack of disruptive innovation will eventually catch up to the company.
But, according to Ginsberg, that may not be case.
“[I]ncremental innovation is not always less desirable than disruptive innovation even though it may not produce the blockbuster earnings that radical innovation can drive,” Ginsberg notes. “This is because investments in disruptive innovations are often very expensive and highly risky such that big bets can lead to big losses as opposed to incremental innovations, which are safer.”
Apple is a sterling example of this. The company doesn’t allocate a tremendous portion of its cash or resources to any one project. They sprinkle it across various product and service verticals, gradually enhancing what are already great offerings. Each small enhancement drives higher engagement, reach and sales, and in so doing, generates a nice return for Apple and its shareholders.
See the iPhone and new cameras lenses. Or the company’s expansion into wearables. Or the launch of Apple TV+ and Apple Arcade. These are all incremental innovations, which, when strung together, are keeping Apple on a healthy sales and profit growth trajectory.
Of course, Apple can’t altogether ignore disruptive innovations. And they aren’t. According to Ginsberg, “[C]ompanies need to become ambidextrous, that is good at balancing the timing of exploratory investments in radical innovation with exploitative investments in incremental innovation … [I]t looks like Apple plans to use its “ deepened pockets” to invest in the next round of radical innovations. A notable indicator of this expectation is Apple’s recent acquisition of Xnor.ai as part of the company’s plans to further enable AI on its devices.”
In other words, it appears that Apple has mastered the art of incremental innovation, without forgetting that disruptive innovation is also necessary. This happy medium is what has driven and will continue to drive the price of Apple higher.
Apple Stock Will Keep Marching Higher
Although Apple stock has come very far, very fast, shares will keep marching higher in 2020 because a bunch of incremental innovations will converge and spark a growth renaissance for the company over the next few quarters.
On the hardware side of things, you have the launch of the super low-priced iPhone SE 2 in early 2020. That phone should be a huge hit in emerging markets where smartphone penetration rates are still low, and in which Apple has plenty of room to grow. Later in the year, you will get Apple’s first 5G iPhone, which should be a huge hit everywhere as consumers rush to adopt 5G tech. The most recent Apple Watch Series 5 was a huge hit this holiday season, and demand appears to be ramping into next year’s launch. AirPods are gaining significant sales traction, too.
Meanwhile, on the software side, it’s all about the expansion of Apple TV+ and Apple Arcade. Both of these services were launched in late 2019, so 2020 will be their first full year of operations. In that first full year, both services will likely add significant content to their portfolios, advertise more aggressively to drum up more service awareness, and grow their user bases by leaps and bounds. As they do, Apple’s entire software business will accelerate in its growth trajectory.
Net net, both Apple’s hardware and software businesses will fire on all cylinders in 2020, thanks to a series of incremental innovations. Revenues and profits will move higher. Against that backdrop, a still-not-that-richly valued Apple stock (only 24-times forward earnings) should be able to power higher.
Bottom Line on Apple
Apple stock has come very far, very fast. But, not too far, too fast. This record rally in the stock should persist deep into 2020, as the company’s software and hardware businesses both gain momentum. Until that momentum eases (which won’t happen soon) or valuation friction gets in the way (which isn’t happening yet), the stock will keep going higher.
As of this writing, Luke Lango was long FB.
