Despite slipping iPhone sales, investors are still pricing in a whole lot of future growth at tech titan Apple (NASDAQ:APPL), whose shares reached a whopping all time high yesterday (January 2), smashing through the US$300 mark.
The stock’s ascent was made all the more remarkable by the fact that a year ago – to the day (January 2, 2019) – Apple had issued a profit warning that sent shares spiraling down to an 18-month low after it cut its sales forecast for the first time in almost 20 years.
Over the course of last year, Apple shares added 86%, meaning it outperformed all its other mega-tech peers.
Can it repeat the trick?
“The question that investors have to ask themselves now is can Apple repeat the trick and surge again in 2020?” says Russ Mould, investment director at AJ Bell, the online stockbroker.
Mould suggests that another 75% share price hike from Apple is ‘pretty unlikely’ this year, as that would require its market cap to go up by an eye-watering US$990 billion.
But he does note: “It’s pretty hard to see how even the Californian giant could generate the sort of earnings growth or cash returns that could spark such an increase in market cap – but then it added nearly $600 billion in market cap in 2019, so if the Fed lets liquidity run riot and markets become positively bubbly then anything might be possible.”
“Some $90 billion in share buybacks and dividends in 2019 may perhaps provide a firmer basis for last year’s market cap advance and such is the current strength of Apple’s cash flow the company may lavish similar returns upon investors in 2020,” he also adds.
Investors are becoming increasingly optimistic about Apple’s gigantic user base of nearly 1.5 billion consumers. This is due to the fact it can leverage auxiliary products, away from iPhones, such as the Apple Watch, Apple TV and for other major hardware upgrade cycles.
Investors are pricing in a lot of future growth at Apple, says Mould, or at “least giving it a lot of credit for reliability and quality of earnings, thanks to the flourishing ecosystem of services and app developers, which mean that customers are sticky and loyal”.
Just a blip?
“That loyalty thesis must view last January’s trading warning as a blip, because Apple’s shares are now trading on 23 times one-year forward earnings, up from 15 times last January,” he adds.
That said, it is worth noting that Apple’s iPhone sales have now slipped year-on-year for four consecutive quarters, due in part, according to Mould, to a saturated market where customers upgrade their devices more slowly, and wearables and services are not yet big enough to take up all of the slack.
Apple’s main selling point for investors this year could be dependent on macro factors, such as a low-growth, low-interest-rate, low-inflation world, especially if it delivers its forecast earnings per share growth of 9%, 16% and 8% over the next three years, adds Mould.
Apple shares slipped 0.66% to US$298.36 on Friday.