Shares of Apple Inc. (AAPL, Financial) have gained a staggering 282% in the last five years, making it one of the top-performing U.S. companies since 2015. It does not come as a surprise that Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) is one of the largest investors in the stock. The recent gains following the announcement of the stock split have prompted many investors to sell out and book handsome returns, whereas Apple bulls argue that now is the worst time to divest considering the expected launch of new iPhones in October.
In this analysis, historical market return data following new device releases will be combined with sales projections for 5G smartphone devices to reach an investment conclusion.
Empirical evidence
Apple has made it a habit of releasing new devices to the market during the latter half of the year, and both tech enthusiasts and investors alike now look forward to these special events to gauge a measure of where the company is headed over the next several years. The share price of Apple, therefore, has turned out to be volatile during the fourth quarter of each year since 2007. As illustrated below, Apple's stock has gained substantially in the 60 days following the launch of new devices in most instances, but there have been times when the market performance was disappointing.
Source: MarketWatch.
The key to these movements has been the perceived success of the new devices by market participants. For instance, the iPhone 6 that was introduced in 2014 is widely considered as a game changer for both Apple and the global smartphone industry, and the stock has accurately reflected the enthusiasm from investors and consumers. Based on this observation, it's reasonable to conclude that investing in Apple before the release of the new 5G-enabled iPhone is a strategy that could lead to attractive returns as consumers are more broadly embracing the technology.
The new devices
Apple has yet to confirm the names of the new phones, but it is widely believed that the lineup will be dubbed "iPhone 12." According to popular websites Cnet and MacRumors, the devices will be announced in a virtual event Apple hosts on either Oct. 13 or 14, which leaves less than three weeks for investors to decide on the company's prospects in the coming quarters. The table below summarizes the expectations of renowned Apple analysts for the upcoming devices.
Source: Tom's Guide.
It remains to be seen whether Wall Street analysts are accurate as to the finer details of the devices. More importantly, however, the new lineup is bound to make headlines considering the revolutionary addition of 5G compatibility.
More room for Apple to grow
Apple is on a mission to become a services company, and the installed base of iPhones, iPads and Mac computers play a massive role in determining its success in achieving this objective. Most of the services offered by the company, such as Apple Music and Apple TV+, are primarily accessed by consumers who are already using Apple devices. The expected surge in new iPhone sales will help the company target its services offering to a much larger pool of consumers, which could lead to a permanent spike in recurring revenue. In January, CEO Tim Cook said:
"Our active installed base of devices has now surpassed 1.5 billion, up over 100 million in the last 12 months alone, reaching a new all-time high for each of our main product categories in geographic segments."
The expected growth resulting from the release of 5G-enabled iPhones will push the installed base a step closer to 2 billion, which is the landmark the company is focused on achieving.
Analysts are turning bullish
The inability of Apple to expand its profit margins over the last several years and the meager growth of net earnings during the same period have been the subject of many negative research notes prepared by Wall Street analysts, despite the seemingly unstoppable rise of the share price. With days numbered to the launch of new devices, however, some analysts are changing their stance on Apple based on the sales projections for the new iPhones. In a note to clients on Sep. 17, Jefferies analyst Kyle McNealy wrote:
"We see historically low upgrade rates and handset subsidies in the U.S. reversing trend, share gains versus Huawei in Europe, and a massive legacy installed base in China looking to upgrade. With this, we raise our price target to $135 from $116.25."
The saturation of the global smartphone industry was cited by many economists and analysts as the primary reason that capped Apple's growth in the last couple of years, but things are finally set to change course as many smartphone owners are currently looking for available options in the market to upgrade to a 5G-enabled device as countries such as the United States and China are aggressively pushing this technology forward.
Apple is likely to attach a higher price tag for these new iPhones as well, which would help expand profit margins. Commenting on this, Raymond James analyst Chris Caso wrote:
"There's no guarantee that current build plans will reflect what consumers will actually buy, but the build plans provide insight into Apple's expectations. We are assuming that Apple will build more aggressively on higher priced models to make sure they are available for holiday purchases, and we expect that lower-priced models will likely sell out before Christmas."
He went on to note that charging an above-average price for the new devices would help Apple achieve growth targets in the coming fiscal year, which should be seen as a positive factor that could help the share price climb higher. This expectation goes hand in hand with the findings of third-party market research institutions. For instance, a survey conducted by Counterpoint Research in August found that consumers are willing to pay a premium price to buy a 5G-enabled smartphone.
Source: Counterpoint Research.
Many analysts seem to have factored in these new developments in their analyses of the tech giant. According to data from Reuters, the median target price for Apple stock is $122.04, which suggests an upside of over 11% from the market price of around $109 on Sept. 24.
Takeaway
Apple has come a long way and is now one of the most valuable companies in the world. Despite being a trillion-dollar company already, the tech giant has what it takes to grow into a much larger organization in the next several years as the launch of 5G-enabled devices is expected to trigger a wave of smartphone upgrades in every corner of the world.
The company plans to become a services giant that does not depend on device sales in the future, which is increasingly becoming a possibility thanks to the secular growth of its installed base that leaves ample room for it to onboard millions of new subscribers to its services offering. The high valuation multiples at which Apple is trading might discourage value investors from buying at this point, but growth investors are likely to find the opportunity appealing.
Disclosure: I do not own any stocks mentioned in this article.
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