Apple Hits New High After Cook Speaks: What Really Drove the Stock

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Apple  (AAPL) - Get Report shares rose to an all-time-high Monday, as CEO Tim Cook gave a keynote address at an annual technology conference and analysts at Cowen increased their price target on the stock. 

Apple shares rose more than 2% to $359, an all-time-high for the stock. This continues a recent run in 2020, as the supply chain and demand headwinds from the coronavirus have abated mostly and the services business has experienced a stay-at-home tailwind. The stock is up 19% year-to-date, versus the S&P 500’s loss of 4%. 

Two notable developments unfolded for Apple Monday. 

The company held the annual Worldwide Developers Conference, where Cook gave a keynote address, a speech that usually sheds light on the broader operating environment for Apple’s multiple businesses. 

TheStreet’s Apple Maven and Founder of DM Martins Research, Daniel Martins said there wasn’t much in the way of market-moving information at WWDC, but that investors and analysts are generally warming up to the company’s ability to grow new business lines like services and 5G devices. 

Cowen analyst Krish Sankar moved his price target up on Apple, citing several reasons. One of the main drivers came from continued bullishness on the 5G device cycle, which seems to be largely powering through global economic and health-related headwinds. "We are raising our iPhone shipment forecasts based on our latest field work and revising our price-to-earnings valuation multiples for the iPhone business ahead of the 5G upgrade cycle, and for the Services segment on expanding recurring revs and peer multiples,” Sankar wrote in a note. 

As for costs, Sankar also says Apple is in-sourcing production of some components for Mac computers, keeping cost of goods sold down, which provides a 46-cent tailwind to 2021 earnings per share. Sankar raised his 2021 revenue and EPS estimates to $298 billion and $15.78 from $295 billion and $14.90. The other 42 cents of his revised 2021 estimates stem from higher revenue growth from service and 5G. 

Sankar’s survey on smartphone builds indicates a new iPhone unit sales forecast of 206 million, many of which include 5G phones. 

He also said the recurring revenue model of services, which is experiencing slightly higher-than-previously-expected adoption rates because of COVID, should bring the earnings multiple higher. The higher-margin services business can compound at an annual rate of 18% for several years, Sankar says. He values the services business at 32 times 2021 EPS estimates, and because of a strong expected multi-year 5G cycle, he values the iPhone business at 22 times 2021 EPS. Buybacks  are also supporting earnings estimates and these multiples brings the blended multiple to 25 times 2021. 

Sankar raised his price target to $400 a share from $335. 

Goldman Sachs Apple analyst Rod Hall also raised his total 2020 5G smartphone unit forecast to 190 million from 170 million and kept his 2021 estimate of 450 million. 

At $359 a share, the stock is trading at 17 times 2021 FactSet EPS estimates, suggesting upside if bulls on the stock are accurate. 

The point: Apple’s services business continues its growth and investors are recognizing the manufacturing and demand rebound globally is indeed supporting a 5G business on track to deliver results close to end-of-2019 expectations. 

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