Apple Inc. (NASDAQ :), the maker of popular iPhones, certainly keeps its bulls happy. The stock shows strong resilience and surprises many analysts who thought the company's mature telephone company would weigh heavily on the stock price.
But that pessimistic case against Apple weakens soon after the launch of the company's iPhone 11, which, unlike several earlier models, receives an enthusiastic reception. Last week, the Japanese Nikkei newspaper reported that Apple has instructed its suppliers to increase the production of iPhone 11 by 10%.
This news is linked to various analysts who put forward their own projections, with similar feedback from the company's supply chain. Wall Street consensus estimates for iPhone shipments in Apple's current fiscal year have increased by 3 million units since the new models went on sale on September 20, according to FactSet.
"We are modestly raising our iPhone volume predictions and expect investor sentiment on AAPL shares to improve significantly," JP Morgan analyst Samik Chatterjee said in a recent note, raising his price target on Apple shares to $ 265 per share of $ 243 per share. . "We are also increasing volume expectations for the 2020/2021 calendar under the guidance of stronger acceptance of 5G-compatible iPhones that are expected to be launched in September 2020," Chatterjee added.
Fed by these positive catalysts, Apple stocks reached a record high of $ 229.93 on October 7. Trading at $ 227.03 at the end of yesterday, the stock has risen around 60% from the low in December. But the big question for the future is whether this bullish trend is sustainable and is this the right time to gamble on Apple for a long time?
Disruption in the supply chain
The risks for the creator of iPhones are many and serious. The biggest among them is the disruption of the company's huge supply chain system – an extensive network of cheap suppliers – as the trade dispute between the US and China intensifies. Officials from China are meeting their American counterparts this week to try and eliminate their differences. And there are media reports saying that China is willing to agree on a limited trade agreement if US President Donald Trump is willing to show some flexibility in terms of rates.
In addition to iPhone 11-related optimism, investors are increasingly confident that China will not hurt Apple if the current trade spit continues due to the company's huge contribution to the Chinese economy. In a note to customers this summer, Bank of America analyst Wamsi Mohan gave a low probability to a scenario in which Apple became entangled in the crossfire between the US and China.
With China's & # 39; s risk reassessed, investors are re-focusing on the company's strong product pipeline and its commitment to accelerate sales through its services division.
A new driver that will increase demand for new hardware is the rollout of the fifth generation, or 5G phones in 2020. Wall Street estimates for the impact of 5G iPhones on Apple are too conservative, according to Jefferies analyst Kyle McNealy.
"We think the street underestimates the benefit that AAPL receives from this post in the 5G cycle," McNealy said in a letter to customers last week. Wall Street estimates that Apple will sell 190 million 5G devices in 2021, which is 9% lower than the six-year average unit volume for the iPhone. McNealy said these estimates are too conservative. He estimates that 208 million iPhones will be sent in 2021.
The latest bullish trend in stock also reflects CEO Tim Cook's success in diversifying Apple's revenue away from iPhones. The company's services, including Apple Music, renting movies and downloading apps, produced 33% growth last year with sales of $ 40 billion – accounting for around 15% of the company's total of $ 265 , 6 billion.
So far, this trend continues. Apple's revenues from iPhones fell by $ 19 billion in the nine months that ended in June. Sales of everything else increased by a combined $ 12.6 billion, showing how quickly the Services division is catching up.
That contribution will continue to grow as the company's new service line – video streaming, Apple Pay and gaming – begins to increase. According to an estimate by Morgan Stanley, the service contribution will continue to grow and could generate around 60% of Apple's revenue in the next five years.
Bottom Line
Apple's current higher position is supported by real improvements in fundamentals and some recalculation of the risk that analysts had associated with the US-China trade war. We continue to recommend Apple stock for long-term investors who want a solid technical name in their portfolio.
