Apple Continues to Impress Gurus and Top Analysts

In an article published on Sept. 24, I concluded that I think Apple Inc. (AAPL, Financial) stock could continue to head higher with the launch of the iPhone 12. Empirical data suggests that investors will enjoy the next 12 months.

The company's market capitalization of over $2 trillion might give the impression to an investor that Apple is too big to grow, but in reality, the expected super cycle in device upgrades resulting from the launch of 5G-enabled devices will most likely push the stock to new highs. Even though there are critics that argue Apple's best times are behind us, Joel Greenblatt (Trades, Portfolio) is one guru that thinks otherwise. During an interview televised by RealVision on Oct. 23, the guru said:

"Apple is one of the greatest franchises that we have ever seen. It is the entryway to the internet. It is for many hundreds of millions of people. It has a very valuable ecosystem as well. It is a great, great business."

He went on to claim that the bull run in tech companies is far from over as the world will shift toward a more connected future in the coming decades. The newly launched devices a couple of weeks ago are already attracting the eyes of analysts and consumers alike, and the outlook for the next 12 months is positive.

Apple's controversial decision could drive sales growth

The tech giant announced four new devices during its online event on Oct. 13:

Source: Apple

The new devices are 5G-enabled, and this is the most distinct characteristic that differentiates these from the previous models. One of the most talked-about features, however, is the fact that all these items are shipped without power adapters or EarPods/earphones. According to Apple executives, this decision was taken in an effort to reach its goal of preserving the environment. However, these items can be purchased on a stand-alone basis through its stores and licensed distributors. They are also not universal, meaning customers are still forced to buy from Apple and its partners. Below is an excerpt from the marketing material prepared by Apple.

"As part of our efforts to reach our environmental goals, the new devices do not include a power adapter or EarPods. Included in the box is a USB-C to lightning cable that supports fast charging and is compatible with USB-C power adapters and computer ports. We encourage you to re-use your current USB-A to lightning cables, power adapters, and headphones which are compatible with these iPhone models. But if you need any new Apple power adapters or headphones, they are available for purchase."

This controversial move by Apple has baffled some consumers as it seems to contradict their stated goals, but analysts believe that accessory sales will grow meaningfully in the coming months as a result of this decision. In a research note sent to clients on Oct. 22, Deutsche Bank analysts wrote:

"While Apple claims that they are not shipping earphones and a charging cube with the iPhone to save the environment, the reality is that such a decision could drive a financial benefit for the company as well."

Accessory and wearable sales have been trending upward in the last few years, and this decision will help Apple diversify its revenue sources even further, which is good news for long-term oriented investors.

Carrier promotions will be a catalyst

Leading wireless carriers in the United States, including At&T Inc. (T, Financial) and Verizon Communications Inc. (VZ, Financial), have rolled out discount schemes to attract new customers to purchase iPhone 12s through them in a bid to onboard these consumers to their 5G service plans. These promotional activities by telecommunication companies have already resulted in analysts revising their unit sales targets to account for the expected boost to sales. For instance, Piper Sandler analyst Harsh Kumar raised his expectations for fourth-quarter sales from 65 million devices to 73 million. In a note to clients, he wrote:

"The heavy carrier promotions will drive significant upgrades for the iPhone 12 series. The iPhone 12 launch has become a subscription battleground for carriers, as they are all offering sizable promotions to keep or add new customers."

Apple is enjoying free marketing from communication companies as they fight for market share in the lucrative 5G industry, and this will remain a tailwind driving Apple's revenue in the foreseeable future.

Apple has got off to a good start

TF International Securities analyst Ming-Chi Kuo has a reputation for accurately predicting Apple device sales and investors closely follow his research to identify potential investment opportunities in the company. In a research note sent to investors on Oct. 19, Kuo reported that Apple has sold up to 2 million iPhone 12 units in the first 24 hours, which is a noteworthy improvement from the 800,000 device sales reported for iPhone 11 in the first day since launch. Commenting on this development, the analyst wrote:

"The iPhone 12 Pro pre-orders beat our expectation because of Apple core fans' initial preference for high-end models, the strong demand in the Chinese market, and the coming peak season demand in the United States and Europe."

As the Holiday Season approaches, sales are likely to pick up pace, enabling Apple to report one of the best quarters in recent history.

The case against Apple

Investing in the tech giant is not without inherent risks. A slowdown in consumer discretionary spending resulting from the current economic recession will be a challenge for the company as its latest devices come with a hefty price tag. The possibility of a production halt in memory chips in Asian countries due to the threat of the pandemic is another risk.

While all these risks are traditional in nature and accounted for by analysts in building their earnings models, Dimensional Fund Advisors highlighted a unique barrier to Apple's performance in the next 12 months. The firm has analyzed the largest 10 stocks at the start of each decade since 1930 and concluded these companies underperformed the broad market by 1.1% over five years and 1.5% over 10 years. In a research report on the subject matter, Dimensional analysts wrote:

"Our research shows that top stocks have historically had much lower returns after joining the top 10, compared to the period of their ascent. From 1927 to 2019, the average annualized return for these stocks over the three years prior to joining the top 10 was nearly 25% higher than the market. In the 3 years after, the edge was less than 1%."

There's no way to know whether history will repeat itself or not, but I think Apple is in a strong position to grow its revenue and earnings. One possible reason behind the disappointing performance of the top 10 companies after achieving that milestone is the lack of growth opportunities available once a company grows into a billion-dollar giant. Apple's case, however, is a complete contrast as the company continues to make strides into lucrative business segments such as health care and wearable sales.

Takeaway

In my opinion, Apple is the most valuable company in the world, and it looks set to report impressive numbers in the year ahead thanks to the recently launched iPhone devices and the expected bump in accessory sales.

According to data from Reuters, the closing stock price of $115 on Oct. 23 indicates a forward price-earnings ratio of over 35, and this might push value investors away from the company. However, renowned gurus such as Warren Buffett (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) continue to believe that Apple is one of the best investments in the market today. The growth expectations for the coming year coupled with the expected recovery in global economic activities could thus push Apple stock to new highs in 2021.

Disclosure: I do not own any shares mentioned in this article.

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