- I made a buy recommendation for AAPL last November when it was trading below $265. I gave it a 90-day price target of $290.
- Apple’s stock set a new record price of $312.67 and closed at $310.33 last January 10, 2020.
- You can do profit taking now or add more Apple shares. My bet is that AAPL can still soar higher. My new 90-day target is $325.
- Apple is still the most profitable smartphone company. Android phone vendors are hurting themselves with their pricing war.
- Even though its notably more expensive than other flagship 2019-era Chinese Android phones, the older iPhone XR is still the world’s best-selling smartphone.
It is reasonable to do some profit-taking on Apple (AAPL). This company’s stock set a new record price of $312.67 yesterday, January 10. Those of you who heeded my buy recommendation for AAPL last November 24 (when the stock was trading at below $245) made notable gains. However, favorable events convinced me that AAPL can still soar higher. I am raising my old November 90-day price target of $290 to $325.
The revenue from the smartphone business might be stagnating/declining. However, AAPL still outperformed the stocks of Microsoft (MSFT), Facebook (FB), and Amazon (AMZN). Based on the chart below, AAPL’s 90-day price performance of 36.38% is notably higher than those three companies’ price returns.
The recent surge in Apple’s stock is because it remains a very profitable hardware company and has a fast-growing Services business segment company. Based on the chart below, quarterly revenue from the Services segment is now $12.51 billion. This is 3.4x higher than Q1 2013’s revenue of $3.69 billion. My fearless forecast is that Apple will end its FY 2020 with $50 billion in annual revenue from Services.
Apple Is Still The Biggest Beneficiary of Mobile Games
As of September 2019, Apple touts 450 million paying subscribers to its various services. More importantly, I really like the 30% cut that Apple gets from iOS in-app purchases. Since 2008, iOS app developers’ cumulative earnings from Apple’s app store is $155 billion. Apple said 25% of that ($38.75 billion) came from 2019. You should add more AAPL shares because this company makes more than $11.6 billion in annual commissions from iOS in-app purchases. More than 80% of that $11.6 billion is from 30% cut from iOS gamers’ spending.
The iPhone models are perceived as not the best devices to play mobile games. However, iPhones remain top-grossing mobile games devices. As of Q3 2019, mobile gaming revenue from iOS devices is still notably higher than that of Google Play-based Android phones – $9.8 billion versus $6.5 billion. Take note that this was in spite of lower number of total game downloads on iOS compared to Android devices – 2.4 billion versus 8.7 billion. The higher-income bracket of iOS device owners is helping Apple’s app store continue to outperform Google Play’s revenue.
Mobile games spending in Q3 2019 on iOS devices was also 19.5% higher than Q3 2018’s $8.2 billion.
Bet More On The Core iPhone Business
Yes, the Services segment is the new growth driver. However, the iPhone business remains a strong tailwind for Apple. The pricing war among Android phone vendors is why Apple will continue to rule as the most profitable smartphone company. As of Q3 2019, Counterpoint Research again reported that Apple continues to dominate the smartphone business. Apple only took 32% of the global smartphone revenue in Q3 2019 but it reaped 66% of the global profit.
More investors likely bought more AAPL since end of November because of the chart below. Except for Samsung, other top vendors of Android phones have operating margins under 8%.
Going forward, Apple’s iPhone business will mostly likely continue its 65% of more operating margin. This in spite of the proliferation of more affordable flagship phones from Vivo, Oppo, and Xiaomi. There are several sub-$500 Android phones released in 2019 but the 2018-era iPhone XR remains the world’s best-selling smartphone. It should impress investors that the more expensive $599 iPhone XR is outselling the $250 Oppo A9 and Samsung (SSNLF) A-series of mid-range Android phones.
The popularity of the iPhone 11 in China is helping Apple lure back customers there. China is Apple’s second-biggest market. The improved cameras, battery life, and performance of the iPhone 11 are again attracting customers away from Huawei in China. China sales will continue to soar once 5G iPhone 12 models are released later this year.
Further, the upcoming $399 iPhone SE 2 will probably outsell $150 Android phones. My fearless forecast is that Apple will still have 40% operating margin on the $399 SE 2. This phone can disrupt the entry-level and mid-range markets for ($100-$300 Android) handsets. Apple’s management recent eagerness to cater to budget-conscious buyers definitely increases its total addressable market.
The more iPhones that are sold ultimately helps grow its 450 million of paying Services subscribers. If a $399 iPhone can add 30 million more paying subscribers, expect the Services segment to generate more than $50 billion in annual revenue starting this year.
The consistent focus on higher-margin phones and services is a long-term tailwind for Apple. Ignore the noise over declining total revenue from iPhones. Fewer number of iPhones sold going forward is not debilitating to Apple’s future prosperity. Retaining its historical very high operating margin on iPhones is still the most important metric to gauge AAPL’s long-term investment quality.
As long as new iPhones are not sold below 40% operating margin (like what Samsung and others are doing), Apple will continue to thrive. Adding more AAPL share while it already trades above $310 is rational. Based on the current valuation chart below, AAPL still has lower Price/Sales and Forward P/E valuation ratios than Microsoft and Alphabet.
The upcoming release of 5G-compatible iPhones this year will likely help Apple wrap-up FY 2020 with EPS as high as $14.15. This year could be a super-cycle for iPhone 7/iPhone 8 owners to finally upgrade their units to 5G iPhone models. Valuing AAPL now with a 23x Forward P/E is reasonable.
The surging revenue from Services should be reason enough for more investors to give AAPL a Forward P/E valuation of 23x. This will still be lower than that of Microsoft and Alphabet’s 26x. Yes, Apple has no Office 365 SaaS or a decent advertising business. However, going forward, $50 billion/year from subscriptions and app store commissions is greater than Microsoft’s total annual revenue from Office 365/Desktop Office. Microsoft’s Productivity and Business Processes segment (covering LinkedIn, Dynamics, Teams, Skype, and Office 365/on-site Office commercial and consumer software products) ended its FY 2020 with annual revenue of only $41.16 billion.
My reiterated buy recommendation for AAPL is backed by its bullish one-year market trend forecast score. I Know First has a 410.78 1-year forecast score for AAPL. This is a super-bullish signal that we should all heed.
Past Success With Apple Stock Forecast
On November 21, 2019, the I Know First algorithm issued bullish forecast for Apple stock price. The algorithm successfully forecasted the movement of the AAPL price. Until today, Apple stock price have risen by 17.91% in line with the I Know First algorithm’s forecast. See chart below.
This bullish AAPL forecast was sent to the current I Know First subscribers on November 21, 2019.
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