Apple Stock Soars On iPhone 6 Demand
Apple, Inc., (Nasdaq: AAPL) stock has been on a tear, up almost 50% since the beginning of the year and is on its way to a sixth straight year of annual growth. The tech giant’s stock price passed $100 in August, and more recently, what was already the largest company in the world passed another milestone when its market capitalization reached $700 billion, a level no other U.S. company has ever reached. The milestone also marked a doubling of the company’s market cap since Tim Cook took over as CEO in August of 2011.
iPhone 6 Generates Confidence
Consumer confidence in Apple has risen since they released larger iPhones in September, followed by a strong earnings report in October. Apple reported $42.1 billion in revenue for the three months leading up to September 27th, beating market expectations of $40 billion, and reported growth of 12%, their highest in two years. Apple’s stock price has increased 20% since that time, spurred on by huge demand for the iPhone 6, along with analysts expectation that the smartphone will have the best holiday season of any of the iPhone devices released until now. Apple always performs well during the last quarter, but this year looks to be exceptionally profitable for the company.
Apple was earlier planning to produce anywhere from 60 to 65 million devices, but they are now producing as many as possible to keep up with demand. Ming-Chi Kuo, an analyst at KGI securities with an excellent track record on Apple products, predicts that Apple will sell 71.5 million iPhones during the holiday quarter, which would mean a 40% jump in sales year-over-year. Samsung Electronics Co., Ltd., one of Apple’s main competitors in the high-end smart phone market, has struggled, and might be transitioning to cheaper technologies, further driving demand for the iPhone 6 up.
Analysts Are Bullish For Apple
The massive demand in the iPhone 6 has caused analysts to increase their price prediction for Apple, with analysts at UBS, RBC Capital Markets, BTIG Research, and Susquehanna all raising their price targets in November to somewhere in the range of $120 per share to $135 per share. There has even been talk of Apple reaching a market cap of $1 trillion. The demand for the iPhone 6 and projected sales during the holiday season have been so great that analysts are bullish even before factoring in Apple’s new product offerings coming in the future.
Cook has overhauled the product range over the past year. Apple will be releasing the Apple Watch early next year, which analysts expect 10% of iPhone users to purchase. This would translate to the sale of 30 million units, providing roughly $10 to $12 billion in added revenue. Early response to Apple Pay, the company’s mobile wallet service, has been promising as well. Apple will also be using their purchase of Beats Electronics to enter into the subscription music services early next year, addressing decreasing iTunes download sales because of competitors such as Spotify.
There are also products that haven’t been announced yet that could make an impact as soon as next year. In September, Cook mentioned in an article that they are working on projects that haven’t even been rumored yet. There has been a long predicted attempt to revolutionize the television business, as well as new speculation that Apple could be investigating virtual reality. Even if Apple’s new product offerings don’t provide huge amounts of revenue growth, the psychological impact is huge, as these are exciting times at Apple.
I Know First is a financial services firm that utilizes an advanced self-learning algorithm to analyze, model and predict the stock market. The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions.
The signal represents the predicted movement direction or trend, and is not a percentage or specific target price. The signal strength indicates how much the current price deviates from what the system considers an equilibrium or “fair” price. The signal can have a positive (predicted increase) or negative (predicted decline) sign. The heat map is arranged according to the signal strength with strongest up signals at the top, while down signals are at the bottom. The table colors are indicative of the signal. Green corresponds to the positive signal and red indicates a negative signal. A deeper color means a stronger signal and a lighter color equals a weaker signal.
The predictability indicator measures the importance of the signal. The predictability is the historical correlation between the prediction and the actual market movement for that particular asset, which is recalculated daily. Theoretically the predictability ranges from minus one to plus one. The higher this number is the more predictable the particular asset is. If you compare predictability for different time ranges, you’ll find that the longer time ranges have higher predictability. This means that longer-range signals are more important and tend to be more accurate.
The figure above is an algorithmic forecast for aggressive stocks made on August 19th, 2014 for the three-month time horizon. Apple had a signal strength of 19.95 and a predictability indicator of -0.12. In accordance with the algorithm, Apple stock price increased 16.13% over the next three months.
Potential Danger to Future Growth
While almost all analysts are bullish on Apple, there are potential pitfalls that could mean trouble for the stock. As mentioned earlier, predictions for iPhone 6 sales are extremely high, and analysts predict the upgrade cycle will have legs into 2015. A major concern would not be living up to these extremely high expectations. Analysts have been raising their price targets for the stock, maybe too high, and missing expectations could cause a market correction that could send the stock tumbling. Its success could also get in their own way, as Apple is projected to capture almost 70% of the high-end smart phone market, leaving little room for more growth.
While Apple Watch and Apple Pay are exciting growth opportunities for the company, the possibility of failure for the two new technologies to catch on and gain traction could have negative implications on Apple’s image, endangering the stock price. Worth watching will be how successfully they are able to enter the Chinese market. A huge untapped opportunity, many expect expanding into China to provide more revenue, but Apple might face stiffer competition than expected. While smartphones are gaining popularity, the iPhone might not be the dominant player, as Chinese brands such as Xiaomi have been successful and could pose a threat for Apple. While these potential pitfalls need to be monitored, the current demand for the iPhone 6 and new product offerings make Apple a very attractive stock to investors moving forward.