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User Growth Is the Biggest Catalyst for Apple Stock

Chris Lau

This time last year the investment community fretted over Apple (NASDAQ:AAPL) offering less transparency in its business. People worried it would make Apple stock less attractive.

User Growth Is the Biggest Catalyst for Apple Stock

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As you’ll recall, Apple stopped reporting unit sales of its iPhones, suggesting instead that investors turn its focus on its services business.

Today, AAPL stock is at all-time highs and enjoys a market capitalization that is over $1 trillion. What is there to like with Apple stock and at yearly highs, what should investors do?

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On Oct. 30, Apple reported Q4 GAAP EPS of $3.03. Revenue grew just 1.8% to $64.04 billion. Markets cheered on the strong profits by sending the stock higher. Unit sales are of little interest to investors now. So, after Apple launched the iPhone 11, lower unit sales will not matter much.

Even if that happens, investors are not pricing in that risk. The iPhone 11 and iPhone 11 Pro models are sure to reverse the 9% decline over last year. This is still an improvement over the 15% decline Apple saw across the first three quarters. Positive reviews, customer feedback, and in-store responses for the latest iPhone suggest device revenue will grow.

In the September quarter, iPhone revenue was 33%. Looking ahead, the iPhone 11’s powerful A13 chip, a dual camera, and longer battery life should drive sales higher in the coming quarter. iPhone 11 Pro and Pro Max have a triple camera system and better night mode photography. Such advanced features will compel Apple’s biggest fans to upgrade.

Strong Services Growth

Apple’s “Services” revenue grew 18% Y/Y to $12.5 billion. Strong performance from App Store, AppleCare, Music, and cloud services lifted results. Apple is on track to double its service revenue sometime next year.

In the transactions business, Apple Pay topped 3 billion transactions. Looking ahead, Apple Card is a promising new endeavour. The card launched in August and is in the early phases.

The current quarter will include results from its Apple TV+, which Apple launched in over 100 countries and regions. Its all-original video subscription service faces a tough market.

Netflix (NASDAQ:NFLX) is the incumbent to beat. AT&T (NYSE:T) will try to gain market share with HBO Max. And Disney+ (NYSE:DIS) charges just a token amount of $6.99 a month, or $69.99 a year ($5.83 a month).

Growth from Apple TV+

Consumers have plenty of choices. If it picks Apple TV+, then expect Apple stock enjoying a P/E multiples expansion. That implies Apple stock could trade to the $300 range in the future.

So, if Apple’s EPS next year is around $15 next year, its forward P/E would expand from 17.5 times to 20 times. That is still a conservative multiple. For instance, it compares favourably to Roku (NASDAQ:ROKU), which is not yet profitable on a GAAP EPS measure.

In addition, Sony Corporation (NYSE:SNE) is valued at ~15 times forward earnings but EPS will grow at 9%. Conversely, Apple’s earnings could grow in the low teens, driven by its services unit expanding.

Growth from Wearables

Google’s (NASDAQ:GOOG) $2.1 billion acquisition of Fitbit (NYSE:FIT) validates the importance of Apple Watch. Apple reported revenue of $6.5 billion in the third quarter from the Wearables, Home and Accessories division.

Fitbit health data and the smartwatch may give Google valuable insight into customers. And for Apple, Watch is becoming an integrated offering for Apple customers. Watch Series 5 now has Always-On Retina display.

New location features help users with navigation. And international emergency calling services is now possible directly from the Apple Watch. This is supported in over 150 countries.

Your Takeaway on Apple Stock

Apple is a consumer electronics giant whose product line-up keeps trending favorably. Competitors in the Android space will keep trying to take Apple’s market share. Yet Apple has a loyal user base who will get more services available on the platform.

Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.

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