Apple (AAPL) - Get Report shares surged Monday and the reason shouldn’t surprise anyone. The company is unveiling its iPhone 12 Tuesday, but there is a lot of information incorporated into the stock move.
The stock rose more than 6% to about $124 a share by 2 PM EDT Monday. After a nasty correction in September, when the stock fell as much as 20% -- a technical bear market -- investors have been willing to pay a roughly 30 times multiple on the next 12 months of earnings. That’s against analysts’ estimates of 8% compounded earnings growth for the next several years. However, analysts TheStreet has spoken with admit short-term and long-term earnings estimates have significant upside across businesses, legacy hardware, wearables and services.
The stock move Tuesday brings Apple’s earnings multiple to just under 35, which may seem stretched to some. Bullish Apple analysts around The Street note that upside 5G sales estimates are a plausible scenario and argue that some analysts are too conservative in their forecasts.
The iPhone 12 release is expected to feature more 5G capability than previous versions. Apple’s iPhone business has seen a significant downward bend in its innovation curve in the last several years and although the 5G cycle is an industry growth driver rather than an Apple-specific one, it’s a strong tailwind that Apple is happy to accept. The lofty multiple may remain in place as stock gains potentially moderate if analysts soon revise hardware estimates on the back of a successful iPhone 12 launch. Apple shares tend to post muted moves after these product events, which often involve heavy anticipation.
Analysts currently expect Apple to sell about 75 million iPhones in each of the next few quarters, up from about 65 million expected just a few weeks ago. Analyst checks from Asia design and semiconductor suppliers indicate strong demand. In 2021, Apple is expected to see more than 10% unit growth for the phone and almost 15% revenue growth (to $160 billion) as the average selling price gets a 5G lift.
Investors want to see strong demand for the iPhone 12, and this launch could be highly indicative of ongoing strength in the consumer demand story for 5G. This would support one-year revenue and earnings estimates and solidify the thesis that higher growth and higher margin services businesses will continue to see support. Apple’s ability to maintain and potentially grow its user base is a key to its ability to uphold current services forecasts, the major driver of the current valuation. A positive read on 5G unit volumes is "a whole other leg to the services story,” Wedbush Securities analyst Dan Ives told TheStreet.
Aside from demand, Ives said investors have their eye on potential supply chain bottlenecks, which Ives currently dubs a “contained risk” for the stock.
Also, Apple is now delivering products from its 300 North America retail locations to anybody within 100 miles of a location. In the work-at-home environment, this could be supportive of sales, although most analysts are not focused on this development. Indeed, Apple’s retail channel is unlike consumer retail businesses like clothing or food, which rely on daily foot traffic. Hardware sales from retail locations are one-off trips to the location by consumers.
Another note on Apple’s valuation: the company has seemingly endless opportunities in growth services businesses like payments in streaming, which it can continue to monetize through its sticky software ecosystem and early potential market share gains through bundled services.
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