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Stick With Apple Stock Because This iPhone Upgrade Cycle Will Be Huge

Luke Lango

Over the course of the past year, Apple (NASDAQ:AAPL) stock has hit a bunch of obstacles. Yet each time, Apple overcame the obstacle, and AAPL continued to move higher.

AAPL Needs One Catalyst, And It’s on the Way

A similar dynamic is playing out right now. AAPL stock has been bouncing around the $220s since early September as tariff risks and rising rate risks have put the brakes on its rally. But tariff risks seem overstated, while it seems premature to worry about rising rates. Thus, all AAPL needs to break out of its slump is one good, fundamental catalyst to reinvigorate investors’ enthusiasm towards Apple stock.

We should get that fundamental catalyst soon, and it should be a big one.

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The 2018 iPhone upgrade cycle will be huge because it has all of the right ingredients. On one hand, you have a bunch of pent-up demand for edge-to-edge iPhones because last year’s edge-to-edge iPhone X, which cost a whopping $1,000, was too expensive. Meanwhile, there are three new edge-to-edge iPhones this year, and the cheapest one, XR, costs just $750, which is the right price. And against this favorable backdrop, the U.S. economy and American consumers are as strong as they’ve been in recent memory.

In other words, it is very likely that AAPL will have a robust 2018 holiday season, led by supercharged iPhone demand. Once that big holiday season materializes, everyone will forget about tariffs and rising rates, and Apple stock will bounce out of its slump and trade materially higher.

This Is the Big Upgrade Cycle

Everyone thought 2017 was going to be the big upgrade cycle. It wasn’t. While the iPhone X checked off all the hype boxes, the $1,000 price point scared away most potential customers. After all, at that time a $1,000 smartphone was unprecedented and ostensibly ridiculous.

Since then, though, $1,000-plus smartphones have become the norm. Edge-to-edge smartphones and phones with facial recognition have also become prevalent.

iPhone owners who didn’t upgrade to the X don’t have any of those things which are now quite widespread. Thus, iPhone owners with older models now feel more outdated than ever before. Furthermore, since $1,000 has become a normal price point for phones, they are more willing than last year to buy Apple’s most expensive device so they do not feel outdated.

Moreover, for those who still think that $1,000 is an unreasonable price, AAPL has launched the iPhone XR. This phone costs just $750 and includes all the key bells and whistles of next-gen iPhones. Demand for this phone should be huge because it removes the one barrier which kept consumers from buying the iPhone X en masse last year: price.

Overall, mostly due to pent-up demand from the vast majority of customers who didn’t upgrade last year, this year’s iPhone upgrade cycle should be huge. Indeed, early reports have been quite strong. Citi just upped its price target on AAPL stock because of what it sees as strong iPhone XS demand. Meanwhile, Bank of America Merrill Lynch recently reiterated its “buy” rating on Apple stock because the firm’s recent Apple customer survey indicated a significant uptick in consumers’ interest in upgrading their iPhones.

Wall Street analysts will keep releasing reports like these, and each one will serve as a positive catalyst for AAPL stock. As a result, it looks like the stagnation of AAPL stock is nearing an end.

Apple Stock Has Nice Upside Potential

Although AAPL stock hasn’t made any material upward progress over the past month, it also hasn’t gone down, and that is a good thing. Amid the recent Wall Street selloff, AAPL stock has done quite well. It is only 2.5% off its recent highs. Many other tech giants are in correction territory, and the entire Nasdaq is 3.5% off its recent highs.

In other words, Apple has outperformed during this selloff. Why? Because the risks facing the broader stock market aren’t that problematic for Apple. Tariffs are a big concern for most stocks, but AAPL has been exempted from such tariffs, indicating that the U.S. doesn’t want to hurt Apple’s business. Rising interest rates are also a big concern for stocks, but AAPL trades at just 20 times its forward earnings, which is a much lower multiple than many of its big-growth peers. As a result, Apple is less susceptible to rising rates.

Overall, the risks facing AAPL stock simply aren’t that big. That is why, instead of dropping sharply, AAPL stock has just been stuck in neutral recently.

Another implication of the recent rangebound trading of AAPL is that any positive news could trigger a big rally in AAPL stock. It certainly feels like the market is just waiting for a reason to push AAPL higher. That catalyst, in the form of a huge iPhone upgrade cycle, will arrive soon and when it does, everyone will forget about tariffs and rising rates, and AAPL stock will head way higher.

Bottom Line on AAPL Stock

This year’s iPhone upgrade cycle will be huge, and that means AAPL stock has attractive upside potential as we head into the end of 2018.

As of this writing, Luke Lango was long AAPL.

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