Shares of technology giant Apple (NASDAQ:AAPL) have been on fire in 2019. They’re up 25% in just over three months as iPhone slowdown concerns have given way to optimism. The reason? Robust growth in their Services business. But this rally is running into some resistance as Apple stock closes in on $200.
Part of this recent, relative weakness is technically based. The stock has come very far, very fast, and is due for a breather. Part of it is optically based. A few analysts downgraded shares over the past week. Finally, a key factor is fundamentally driven. The valuation underlying AAPL stock is no longer dirt cheap.
But all these “headwinds” are near term in nature. The technicals will normalize with some consolidation and ultimately allow for another run higher in the stock. Wall Street downgrades won’t continue forever since the narrative is actually improving. And, the valuation is only expensive relative to history, and not relative to future growth prospects.
All in all, while Apple stock may run into continued resistance at $200, this obstruction is basically just the stock taking a much-needed breather before its next leg higher. As such, long-term investors have no need to worry. Staying the course remains the best option here.
Resistance Against Apple Stock Is Near Term in Nature
Broadly speaking, three factors have weighed on AAPL stock recently:
- Overbought technicals. The robust early 2019 rally in Apple stock was one of the biggest and fastest rallies this stock has had over the past several years. But it also pushed many technical indicators — like the relative strength index — into overbought territory.
- Wall Street downgrades. For most of the year, analysts have been consistently upgrading AAPL stock on Services upside. But recently, a few investment firms have downgraded the stock based on a pessimistic outlook for iPhone growth in 2019.
- Valuation concerns. Apple stock entered the year at just 12.5-times forward earnings, which is historically very cheap. Now, shares trade at 17-times forward earnings, and that’s comparatively expensive.
Counterarguments Supporting the Bull Case
However, these drags on AAPL stock won’t last for long. Mostly, this is because all these headwinds are either fleeting or the result of a general market misunderstanding. See as follows:
- Stocks don’t stay technically overbought forever. They hit new highs, then they consolidate and trade sideways. As they do, the moving averages have time to catch up, the stock has a chance to take a breather, and the overbought conditions fade away. As such, Apple stock right now is in the process of getting out of technically overbought territory. A few more days/weeks of sideways trading will do the trick.
- Downgrades will turn into upgrades. The fundamental narrative here is in reality getting better. Global economic conditions are improving, especially in China, which is where Apple gets a big chunk of its iPhone growth. Plus, iPhone outlooks for this year are generally pessimistic. This leaves room for upside if Chinese growth comes back into the picture. More importantly, the Services business is ramping up with great pace, and new services like Apple News+, Apple Card, Apple TV and Apple TV+ will drive strong growth in 2019.
- The valuation is cheap relative to peers. Among the widely-followed FAANNG group, Apple is the cheapest stock by a mile on a forward basis. To be sure, that’s largely because growth is projected to be slower. But as Apple pivots more into software businesses, the company will grow more quickly at higher margins and look more like its FAANNG peers. As such, today’s valuation is actually very reasonable.
Long-Term Upside Is Compelling
In the bigger picture, AAPL stock has healthy upside thanks to the company’s unique and tremendous opportunity to monetize its one billion-plus device ecosystem.
The past ten years at Apple has been defined by creating the world’s internet device ecosystem. Not only that, they’re still pushing their weight. This ecosystem now measures in at 1.4 billion devices internationally.
Over the next ten years, though, the story at Apple will be much different. As opposed to growing what is already the world’s largest internet device ecosystem, Apple will focus on deeply monetizing that ecosystem using a variety of software subscription services. This includes the tried-and-true Apple Music and App Store. It will also include new services like News+ and TV+. Considering the direct audience for all these services measures 1.4 billion, the opportunity here is huge.
Thus, even without any hardware increases, Apple projects as a healthy grower over the next several years thanks to the Services ramp-up. These businesses also have higher margins (software margins are greater than hardware margins), so the impact on the bottom line will be doubly positive.
All in all, I see Apple as a mid-single digit revenue growth company over the next several years, with healthy margin drivers and a ton of buybacks in the pipeline. Ultimately, I think that drives earnings per share towards $19 by 2025. Based on a market-average 16 forward multiple, that equates to a 2024 price target for AAPL stock of over $300. Discounted back by 8.5% per year (below my 10% discount rate to account for the yield), that equates to a 2019 price target of just over $200.
Bottom Line on AAPL Stock
For various reasons, Apple stock is due to hit some turbulence at the critical $200 level. But this turbulence is nothing to worry about in the grand scheme. Long-term, AAPL stock has healthy upside potential with a low risk profile, mostly thanks to the company’s unprecedented internet device ecosystem and its ability to further monetize that ecosystem.
As of this writing, Luke Lango was long AAPL.