Warren Buffet Is Right About Apple Inc. Stock
Warren Buffet keeps talking up Apple Inc. (NASDAQ:AAPL), and the stock keeps heading higher.
Buffet has been publicly bullish on Apple stock for a while now. But the celebrated investor has grown more vocal in his support for the company over the past several weeks. Most recently, Buffet said that he likes the stock so much, that he would own 100% of it if he could.
Now, Apple stock is at a new all-time high with a market cap right around $940 billion. That means AAPL is only $60 billion shy of joining the ultra-exclusive trillion dollar club.
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I think Apple will hit that all-important trillion dollar mark quite soon. In fact, I think AAPL stock could break out healthily above the trillion-dollar mark in the near future. As such, I remain bullish on AAPL stock, even at all-time highs.
Here’s a deeper look:
AAPL Is Morphing Into Something Bigger
The biggest knock against Apple is the company’s ostensibly lackluster iPhone performance this year. The company’s latest and greatest iPhone X was supposed to catalyze a massive super-cycle, the likes of which had never been seen before. Apple, with essentially 70% sales dependence on the iPhone, was supposed to rally alongside that super-cycle.
But that never happened. The $1,000 iPhone proved too expensive and too similar to previous models to really be a game-changer. As such, the iPhone X largely missed expectations in the holiday quarter and Apple stock dropped.
But not for long.
As it turns out, Apple got to this point because of the iPhone. But now, the iPhone business is largely just steady because everyone already has a smartphone. (Future growth will come from higher average selling prices.) Thus, the next leg higher in Apple stock won’t be driven by the iPhone. Rather, it will be driven by everything else.
And everything else is doing really well now.
Mac and iPad sales are inflecting upward. Apple Watch sales are on fire, and all signs point to that smartwatch just running away with the red-hot wearables market. Apple TV hasn’t been a huge hit, but with streaming services becoming more and more important, Apple TV’s value proposition will only become more apparent. HomePods are the right product at the right time. Beats and Airpods dominate the headphones market.
Most importantly, Apple has this giant Services business, which is ramping rather quickly. That business is essentially Apple’s attempt to monetize its massive ecosystem of iPhone, iPad, and Mac users. The business is also particularly high-margin and has more predictable revenue streams — it is mostly subscription businesses. Consequently, revenues going forward should be higher margin and less lumpy.
All together, it is pretty easy to see that Apple is going from an iPhone company to something much more. That much more is a consumer hardware company with a booming software business, higher margins and greater revenue predictability.
Apple Stock Is Undervalued
This transition is currently being undervalued by the market.
As a result of this transition, Apple should be able to grow both revenues and margins at a healthy rate over the next several years — even without a major iPhone upgrade catalyst. Even under mild revenue growth and margin growth assumptions of 5% revenue growth per year and operating margin expansion to 30%, I still think AAPL can do about $20 in earnings per share in five years.
Apple stock normally trades at 13-times forward earnings. The market usually trades at 16-times forward earnings. If Apple’s Services business continues to bring higher-margin and more predictable revenue streams into the fold, that should be rewarded with a higher multiple. Thus, Apple stock in the future should reasonably trade at the midpoint of 13- and 16-time forward earnings.
A 14.5-times forward multiple on those $20 earnings implies a four-year forward price target of $290. Discounted back by 10% per year, that equates to a present value of roughly $200.
Bottom Line on Apple Stock
Apple is becoming much more than just an iPhone company, and this transition away from iPhone-dependence will power Apple stock to the trillion dollar club in the near future.
As of this writing, Luke Lango was long AAPL.
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