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Stock Deconstruction

Will a new iPhone continue to grow Apple’s share price?

Apple’s [AAPL] share price is up 67.07% since the start of 2020 (as of 26 August’s close). It is also up an impressive 30.42% since its Q3 earnings call on 30 July, during which it announced a 4-for-1 stock split. In the process, Apple’s share price stormed past the $400 mark for the first time in its history. 

At close of trading the following day, Apple’s share price was up 11% on the week. 

On 19 August, the company became the first in the US to reach a $2tn valuation. On 24 August, Apple’s share price climbed past the $500 mark to close at $503.43.

The stock split — which Apple’s board of directors hopes will “make the stock more accessible to a broader base of investors” — is the fifth since the company went public. On 28 August, “shareholders of record” will receive three Apple shares for every one they already own. Trading will then begin on the new shares-adjusted basis on 31 August. 

Following the split, Apple’s share price is expected to sit at circa 25% of its price prior to the 31 August.

The stock split may have surprised shareholders, but it followed a Q3 2020 earnings that blew estimates out of the water. Furthermore, the upcoming release of the iPhone 12 has captured the attention of analysts and prompted many to suggest that Apple’s share price still has further upside.

 

 

 

Apple provides sales sustenance

In Apple’s Q3 earnings it announced that revenue was $59.7bn, up 11% on the $53.8bn posted for the same period a year ago and beating analysts’ expectations of $52.3bn. The tech giant also reported a profit of $11.25bn, up 12% from $10.04bn.

It was the best quarter for year-over-year revenue growth since Q4 2018, according to Statista data.

Earnings per share, meanwhile, were $2.58, 26.5% higher than the $2.04 predicted by the analysts. 

The earnings were remarkably robust considering the potential impact COVID-19 could have had on Apple’s supply chains and factories in China. 

Consumer reluctance to spend big on luxury items like gadgets while job security and income were in the balance was another factor that was expected to see Apple deliver less impressive results.

To the contrary, iPhone revenue was $26.42bn, up a little under 2% year-over-year, and revenue from iPad sales jumped 31% to $6.58bn. Revenue from other products, including Apple Watch and AirPods, climbed nearly 17% to $6.45bn.

$26.42bn

Apple iPhone Q3 revenue

Prior to the earnings call, some investors were concerned that Apple would announce a delay to the release of its next-generation, 5G-enabled smartphone, the iPhone 12. 

However, investors will have been buoyed by news that the release has been pushed back by just a few weeks and is due to be released to the public before the end of 2020 and the holiday season.

 

Apple super cycle excites

“We believe [the iPhone 12] represents the most significant product cycle for [Tim] Cook [and the company] since iPhone 6 in 2014,” Daniel Ives, analyst at Wedbush Securities, wrote in a note to clients, as reported by The Street. 

Ives notes that there are 350 million Apple smartphones due for an upgrade soon and the release of a 5G-enabled handset might spur users on to upgrade earlier than they would otherwise.

Ives suggests that there are many on Wall Street who are “underestimating the massive pent-up demand around this supercycle for Apple, which remains the opportunity for the bulls heading into 2021”. He raised his target for Apple’s share price to $515 from $475 and set a bull scenario target of $600.

Evercore ISI research analyst Amit Daryanani believes investors would be better placed to buy at Apple’s share price this side of the iPhone launch, according to Barron’s. After all, history shows that the stock has been a good investment in the 180 days prior to a launch.

“We believe [the iPhone 12] represents the most significant product cycle for [Tim] Cook [and the company] since iPhone 6 in 2014” - Daniel Ives, analyst at Wedbush Securities

“In past launches, the greatest average outperformance has come during the 180-day period leading to the launch. The 90-day period prior to the launch has also generated solid outperformance with lower volatility than the 180-day period,” Daryanani wrote in a note. “The 30- and 90-day periods following a launch have underperformed on average, although the dispersion of results here is far wider than in the periods prior to the launch.”

Daryanani reiterated an Outperform rating and raised his price target from $440 to $460.

On the other hand, Wolfe Research analyst Jeff Kvaal isn’t so sure that a 5G super cycle is around the corner. He has assigned the stock an Underperform rating and pins a target of just $315 on Apple’s share price — one of the more bearish moves made over the last few months. He has forecast iPhone 12 sales to be flat or slightly below iPhone 11 orders in 2019. 

As well as iPhone 12 sales, future revenue could be boosted if Apple begins to offer subscription bundles, as has been reported. This would provide a healthy recurring revenue stream. It’s been rumoured that it will also start to offer virtual fitness and workout classes that could potentially rival Peloton [PTON]

In Q3 2020, paid subscriptions grew by 35 million to 550 million subscribers in total, up 130 million year-over-year. The company’s target is to reach 600 million by the end of the calendar year. 

Although there are strong tailwinds pushing the company to further growth going into fiscal 2021, investing now comes with risks attached. 

Apple’s share price is trading at circa 37 times earnings, which some — albeit a minority — would argue makes the current price too high and leaves the tech giant overvalued.

There are currently 46 Wall Street ratings available, according to MarketBeat. Twenty-eight of them are a Buy, 14 a Hold and just four a Sell.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

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