Is Apple’s 60% Jump From Its December Low Sustainable?

Is Apple’s 60% Jump From Its December Low Sustainable?

Apple Inc (NASDAQ:AAPL), the maker of popular iPhones, is certainly keeping its bulls happy. The stock is showing strong resilience, surprising many analysts who thought the company’s maturing phone business would weigh down hard on its share price.

But that pessimistic case against Apple is weakening fast after the company’s launch of the iPhone 11, which, unlike several previous models, is getting an enthusiatic reception. Indeed, last week, Japan’s Nikkei newspaper reported that Apple has instructed its suppliers to ramp up iPhone 11 production by 10%.

This news is coupled with several analysts raising their own projections, citing similar feedback from the company’s supply chain. Wall Street’s 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 Sept. 20, according to FactSet.

“We are modestly raising our iPhone volume forecasts and expect investor sentiment on AAPL shares to improve materially,” J.P. Morgan analyst Samik Chatterjee said in a recent note, raising its price target on Apple stock to $265 a share from $243 a share. “We are also increasing calendar 2020/2021 volume expectations led by stronger adoption of 5G enabled iPhones expected to be launched in September 2020,” Chatterjee added.

Fueled by these positive catalysts, Apple shares hit a record high of $229.93 on Oct. 7. Trading at $227.03 at yesterday’s close, the stock has rebounded about 60% from its December low. But the big question going forward is whether this bullish trend is sustainable and is this the right time to bet long on Apple?

The risks to the maker of iPhones are many and serious in nature. The biggest among them is the disruption in the company’s massive supply-chain system — a comprehensive network of low-cost suppliers — if the U.S.-China trade dispute intensifies. Officials from China are meeting with their U.S. counterparts this week to try to iron out their differences. And there are media reports saying that China is willing to agree on a limited trade deal if U.S. President Donald Trump is willing to show some flexibility on tariffs.

Besides the iPhone 11-related optimism, investors are becoming increasingly confident that China won’t hurt Apple if the current trade spat continues because of the company’s massive contribution to the Chinese economy. In a note to clients this summer, Bank of America analyst Wamsi Mohan gave a low probability to a scenario where Apple gets caught up in the U.S.-China crossfire.

With the China risks being re-evaluated, investors are again focusing on the company’s strong product pipeline and its push to accelerate sales through its services division.

One new driver which will increase the demand for new hardware is the roll-out of the fifth-generation, or 5G phones in 2020. Wall Street’s 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 AAPL gets from this heading into the 5G cycle,” McNealy said in a note to clients last week. Wall Street is estimating that Apple will sell 190 million 5G devices in 2021, which is 9% below the six-year average unit volume for the iPhone. McNealy said these estimates are too conservative. He estimates 208 million iPhones will be shipped in 2021.

The latest bullish trend in the stock is also reflecting CEO Tim Cook’s success in diversifying Apple’s revenue away from iPhones. The company’s services, which include Apple Music, movie rentals and app downloads, produced 33% growth last year with sales touching $40 billion–accounting for about 15% of the company’s total of $265.6 billion.

So far this year, that trend continues. Apple’s revenue from iPhones fell by $19 billion in the nine months ended in June. The sales of everything else increased by a combined $12.6 billion, showing how quickly the Services division is picking up the slack.

That contribution will continue to grow once the company’s new line of services— video-streaming, Apple Pay and gaming — start to chip in. According to an estimate by Morgan Stanley, the services contribution will continue to grow and could generate about 60% of Apple’s revenue in the next five years.

Bottom Line

Apple’s current move higher is backed by real improvements in fundamentals and some re-pricing of the risk that analysts had associated with the U.S.-China trade war. We continue to recommend Apple shares for long-term investors who want to have a solid tech name in their portfolio.