AAPL Above 500 – Where do we go From Here?

Original Publish Date: August 30, 2020

With AAPL closing above 500 Monday, the company firmly sits with a market cap of 2.15T. To put this growth into perspective, it took AAPL 42 years to reach a market cap of 1T. In 2 years it more than doubled. With the explosiveness of moves we’ve seen in other companies like AMD, where the stock returned about 700% in the same period, this move might not seem like much. However, AAPL is more than 20x larger than AMD, and the rules of large numbers begin to apply. Take, for instance, FB with their 2.7B active users a month. This is roughly 34.6% of the world’s population and 59.1% of the world’s population that currently has an internet connection.

Facebook is already the dominant social media platform by a wide margin. But what about Apple?

Apple has about 1.5B devices currently in use, with many households having multiple devices. Apple’s share of the smartphone, personal computer, tablet and wearables markets in 2019 was approximately 14%, 7%, 35% and 32%, respectively. Note that these are percentages of total unit sales, not world population. There are opportunities to grow substantially before they run into the kind of market dominance enjoyed by Facebook. One could rightly question the comparison.

Not so fast. Over the last two years, while their hardware sales have moved around a bit, their continued push into services has been impressive. Since 2016, they have doubled revenues in the high margin services business. It is this development that has caused Apple’s valuation to expand to be more in line with the multiples enjoyed by Facebook, Google and other “platform” companies. Apple’s support of trade in programs, development of secondary markets for Apple products, and the introduction of lower cost phones directly supports Apple’s strategy to get consumers into their “ecosystem” so they can market their expanding service menu.

Nevertheless, Apple still derives a majority of its revenues from hardware, specifically, the iPhone. While new iPhone sales have been comparably weaker than previous years due to consumer propensity to hold onto their devices longer, the introduction of 5G enabled phones this Fall would mark the most compelling reason to upgrade in many years. Our view is that the desire and ability to work remotely, and the willingness of employers to facilitate a remote work force, and the need for remote education will combine to make 5G enabled devices (including Macs and iPads) a “must have”.

Apple is not, however, without downside risks. The 30+ % increase in price in the last month puts the stock about 18% above its 50 day moving average of $422, which has been a support level. Accordingly, weakness in tech, or the broader market, could cause selling pressure as people trim their biggest winners in favor of more defensive sectors. Additionally, while the new lineup of phones has been slated to arrive only a few weeks later than scheduled, additional delays could put short term pressure on the stock. Finally, while we view it as the risk least likely to occur, one should be cognizant of the chance that the work from home value falls short and hardware sales lose momentum.

A price target of $540 is reasonable based on strong price momentum and a healthy outlook on hardware and service sales. We are overweight, though we see the potential for a more attractive entry point before year-end. As such, we are waiting for a pullback before upsizing our position.

 

Disclosure: I am/we are currently long AAPL.

This article expresses my own opinions. I am not receiving compensation for this article – other than from Honey Investments. I/we have no business relationship with any companies whose stock is mentioned above.

Optimistic Long Term View
Overweight
Short-term Risks are Prevalent

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AAPL Above 500 – Where do we go From Here?

Original Publish Date: August 30, 2020

With AAPL closing above 500 Monday, the company firmly sits with a market cap of 2.15T. To put this growth into perspective, it took AAPL 42 years to reach a market cap of 1T. In 2 years it more than doubled. With the explosiveness of moves we’ve seen in other companies like AMD, where the stock returned about 700% in the same period, this move might not seem like much. However, AAPL is more than 20x larger than AMD, and the rules of large numbers begin to apply. Take, for instance, FB with their 2.7B active users a month. This is roughly 34.6% of the world’s population and 59.1% of the world’s population that currently has an internet connection.

Facebook is already the dominant social media platform by a wide margin. But what about Apple?

Apple has about 1.5B devices currently in use, with many households having multiple devices. Apple’s share of the smartphone, personal computer, tablet and wearables markets in 2019 was approximately 14%, 7%, 35% and 32%, respectively. Note that these are percentages of total unit sales, not world population. There are opportunities to grow substantially before they run into the kind of market dominance enjoyed by Facebook. One could rightly question the comparison.

Not so fast. Over the last two years, while their hardware sales have moved around a bit, their continued push into services has been impressive. Since 2016, they have doubled revenues in the high margin services business. It is this development that has caused Apple’s valuation to expand to be more in line with the multiples enjoyed by Facebook, Google and other “platform” companies. Apple’s support of trade in programs, development of secondary markets for Apple products, and the introduction of lower cost phones directly supports Apple’s strategy to get consumers into their “ecosystem” so they can market their expanding service menu.

Nevertheless, Apple still derives a majority of its revenues from hardware, specifically, the iPhone. While new iPhone sales have been comparably weaker than previous years due to consumer propensity to hold onto their devices longer, the introduction of 5G enabled phones this Fall would mark the most compelling reason to upgrade in many years. Our view is that the desire and ability to work remotely, and the willingness of employers to facilitate a remote work force, and the need for remote education will combine to make 5G enabled devices (including Macs and iPads) a “must have”.

Apple is not, however, without downside risks. The 30+ % increase in price in the last month puts the stock about 18% above its 50 day moving average of $422, which has been a support level. Accordingly, weakness in tech, or the broader market, could cause selling pressure as people trim their biggest winners in favor of more defensive sectors. Additionally, while the new lineup of phones has been slated to arrive only a few weeks later than scheduled, additional delays could put short term pressure on the stock. Finally, while we view it as the risk least likely to occur, one should be cognizant of the chance that the work from home value falls short and hardware sales lose momentum.

A price target of $540 is reasonable based on strong price momentum and a healthy outlook on hardware and service sales. We are overweight, though we see the potential for a more attractive entry point before year-end. As such, we are waiting for a pullback before upsizing our position.

 

Disclosure: I am/we are currently long AAPL.

This article expresses my own opinions. I am not receiving compensation for this article – other than from Honey Investments. I/we have no business relationship with any companies whose stock is mentioned above.

Optimistic Long Term View
Overweight
Short-term Risks are Prevalent

Ready to Take Your Portfolio Return to the Next Level?

Monumental Growth

It only takes a few minutes to get started!

We’ve returned more than 14,000% to investors since inception April 2018.

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