Apple (NASDAQ:AAPL) has had an incredible turnaround in 2019. It started the year off with a sales warning that sent the stock into freefall. But, by year end, shares have more than doubled from that low point. And the party hasn’t stopped yet.
Source: George Dolgikh / Shutterstock.com
In fact, with the recent announcement of a potential trade deal with China, one of Apple’s big headwinds appears to be lifting.
Apple shares are up nearly $90 — a 40% move — just since September. Even after this exponential rise, analysts are predicting yet more gains in 2020. It’s time to fade the trend, however, and start locking in profits on Apple. Just as sentiment got way too negative a year ago, people are becoming much too exuberant today.
Will Apple Win The Next Decade?
As we move into the new decade, it’s important to keep some perspective. Just 10 years ago, heading into the 2010s, Nokia (NYSE:NOK) was ranked in the top 10 for most powerful consumer brand in the world. Now, people have forgotten about Nokia almost entirely.
Apple won’t fall off as quickly as Nokia did, but a ton can change in ten years in the tech world. People largely buy the same food, drink the same beverages, buy the same apparel brands that they did a decade ago. However, technology evolves so quickly that a towering giant like Blackberry (NYSE:BB) or Nokia can virtually disappear in a decade.
To that end, imagine what Apple’s flagship product will look like in 2030. Will we even be carrying smartphones around? Or will the product category have been totally reinvented by then?
That’s why Apple’s lack of innovation since Steve Jobs’ passing is so troubling. On many fronts, Apple has allowed rivals to beat it with new tech hardware. As long as the smartphone remains in its present form and its existing consumers stay loyal, Apple will make a lot of money; But it’s not a business that deserves a high price-earnings (P/E) ratio.
There’s a good reason that folks were pricing Apple in the 12-14x P/E range for so long before the stock finally took off in 2019. If Apple doesn’t come up with another act soon, it will be categorized with the same old stale tech label that caused stocks like Intel (NASDAQ:INTC), Cisco (NASDAQ:CSCO) and Microsoft (NASDAQ:MSFT) to trade like dead money for nearly the entirety of the 2001-15 time period.
Too Big To Grow
Apple shares are currently selling for 24x trailing earnings and 19x forward earnings. That doesn’t sound terrible at first glance, But remember that Apple sold for under 15x earnings on many occasions over the past five years.
Additionally, it becomes really hard to grow earnings once you are Apple’s size. The company earned $64 billion last quarter. Uber (NYSE:UBER) by contrast, has a market cap of just $52 billion. When you make more money in one year than the entire market cap of a large tech rival – or the GDP of a small country – it becomes hard to grow.
For Apple to get to 15x earnings at the current share price, it would need to tack on nearly $20 billion a year of additional earnings. Not revenues, but earnings. How many more smartphones sales would that be? Apple doesn’t have another big thing going, either. It’s not bringing in big revenues from cloud, advertising or a hot new hardware product — as tech rivals have surpassed them on various fronts.
An Out-Of-Control Momentum Trade
Apple’s stock has clearly gone into a parabolic sort of move. It’s simply unnatural for the country’s largest stock to run up 40% in just a few months. The value of its actual operating business surely hasn’t gone up by $400 billion since September, even if the market cap has.
With the stock market roaring higher into year end, there’s a lot of money going into index funds. What’s the largest constituent in your average S&P 500 or NASDAQ ETF? That’s right, Apple. Additionally, billionaire investor Warren Buffett has bought a ton of Apple in recent years, and his endorsement has given the stock the greatest sort of celebrity backing.
For folks wanting to get long stocks into a raging bull market, Apple has been a no-brainer pick. And, as the share price inexorably climbs, people feel it is a sure thing and throw more money at it. Whenever a correction hits, though, money will flow out of Apple at record speed.
Final Thoughts on Apple
Just one year ago at this time, investors were fearful for Apple’s future. The company’s business had gone into a temporary slump, and shares went into freefall following a surprise profit warning in January.
It was Apple’s darkest moment in years, and many bears proclaimed that the Apple era was winding down. Instead, the company quickly turned things around after that terrible quarter, and the share price moved 80% higher within 12 months. In fact, Apple’s turnaround was one of the most surprising sentiment swings in a large-cap stock in many years.
Tap back into that feeling from January, though, for a second. It wouldn’t take that much for the market to feel that sort of negativity again. Trade deal or no trade deal, Apple is struggling in China. It’s price point is too high to work in many emerging markets, in fact.
The services strategy doesn’t appear to be a cure-all. Apple can keep riding its smartphone supremacy in a few mature developed countries for at least a few more years. But without something new, Apple’s inflated stock price will come crashing back down.
At the time of this writing, Ian Bezek owned Intel stock. You can reach him on Twitter at @irbezek.
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