After doubling the value of their holdings in the last year, a logical question for investors in Apple's stock (NASDAQ 🙂 is whether it is time to take some risk off the table and put their holdings on this mega- reduce technology?
The proponents of this call have to make a point. The stock has risen more than 100% in the last 12 months to reach another record on Friday and closed at $ 310.33. Indeed, Apple's profit is now the largest in the group of the top five technical giants including Amazon.com (NASDAQ 🙂 and Google & # 39; s owner Alphabet (NASDAQ :).
Apple's monthly price chart
For the first time since 2011, shares of the iPhone maker are traded at a higher price-to-earnings ratio than nearly doubled after the valuation of the share in 2019. It is a reversal compared to the previous nine years when concerns about a lack of product innovation kept the stock with a sustained discount on the market.
After a powerful rally in 2019, Apple is trading against 26 times the profit last year, the highest level since 2008. That is comparable to a multiple of 24 for the S&P 500. The size of the current Apple rally has up to led to concern that the share must be corrected.
At yesterday's share price, the stock is traded more than 12% higher than the average target price of analysts. Seven of the 49 analysts followed by Bloomberg and covering Apple have sales ratings, most in at least nine years.
Apple investors ignore Bearish case
Despite these concerns, Apple's continuing strength shows that investors have begun to ignore a bearish scenario calling for the company to be avoided because growth is too dependent on iPhones. The flagship product still contributes to around half of total sales, making the company vulnerable to a shift in consumer preferences and a potential slowdown in economic activity.
One of the biggest factors that help a strong bull case for Apple is the rapidly evolving ecosystem of products and services that helps the company deepen its penetration. Apple's service unit, including growth companies such as the App Store, Apple Pay and Apple Music, is picking up and contributing more to the company's total revenue each year.
According to analysts' predictions, the number of iPhones sold this year will be far below the total number sold during peak iPhone years of 2015, 2016, 2017 and 2018. And yet Apple is expected to exceed $ 275 billion this year thanks to the evolving business model.
Apple's revenue from services is expected to rise to $ 54 billion in fiscal 2020, accounting for one-fifth of total revenue, an increase of 18% at the end of 2019, according to analyst data from Bloomberg.
In addition to these growth factors, the macro environment, which became hostile last year after trade between the US and China and the growing risk of recession, is improving rapidly. The stock market is rising, volatility is low and employment is growing.
The US Federal Reserve is firmly on the sidelines and it seems unlikely that President Donald Trump would intentionally cause market shocks in an election year. This positive background ensures that consumers worldwide spend more money on gadgets. Apple's iPhone sales in China, the company's largest foreign market, rose by more than 18% last month according to CNBC calculations.
Bottom Line
Apple's drive to reduce its dependence on iPhones shows clear signs of success. This means that the company has developed a very robust ecosystem that is built around its service company. This momentum weakens the bear case against Apple shares and feeds the current rally. In our opinion, investors in this very favorable environment would be better off holding their Apple shares instead of taking a profit.
