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After reporting quarterly earnings Wednesday, Apple’s stock came close to $250, a target we had previously set.
Looking forward, here is the key question: How high can Apple’s AAPL, +1.94% stock go? Let’s explore with the help of a chart.
Please click here for an annotated chart of Apple stock.
Note the following:
• The chart compares Apple stock to the Dow Jones Industrial Average DJIA, -0.81%, S&P 500 ETF SPY, -0.59% and internet ETF FDN, -0.98%.
• The comparison with the internet ETF is important. The top holdings of the ETF include Amazon AMZN, -0.18%, Facebook FB, +2.06%, Netflix NFLX, -1.12% and Google holding company Alphabet GOOG, -0.28% GOOGL, -0.37%. As the chart shows, Apple has significantly outperformed not only the indexes but also the internet ETF.
• The chart shows that Apple stock fell in the Arora buy zone in December 2018. The low band of the buy zone was $147.31.
• On May 2, 2018, The Arora Report raised Apple’s price target to the zone of $240 to $250. We subsequently reiterated the target zone.
• Our thesis was summed up in the following sentence: “When Wall Street starts understanding the transition, Apple’s stock is likely to move up to the Arora Report’s target zone of $240 to $250.” Please see “Apple stock’s next milestone is $250 as the company makes a crucial transition.”
• In due course, Wall Street started understanding the transition.
• My longstanding prediction from years ago was that Apple would make a transition to services. I also predicted that Apple would start getting a higher price-to-earnings (P/E) ratio when its service revenue reached 20% of total revenue.
• Apple’s earnings report shows that Apple is succeeding with the transition.
• On Oct. 23, before the earnings release, The Arora Report raised Apple’s very long-term target zone to $325-$365. To the best of my knowledge, this is the highest target around at this time.
• The earnings report shows that services and wearables are performing ahead of expectations.
• When the 5G phones from Apple come out, there will be a massive upgrade cycle.
• In the future, Apple may reach an inflection point where revenues from health-care-related offerings may dramatically increase.
• There are reports that Apple is planning a low-cost phone for emerging markets. This will be a big step in the right direction.
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Risks
Risks in Apple stock are generally underestimated. Before you send me hate mail for pointing out the risks, understand that Apple has been in The Arora Report’s portfolio since it traded at $18.73. At that time I talked about a scenario of a $1,000 target for Apple’s stock (pre-split of 7:1).
Here are the main risks:
• So far, Apple has handled the China trade war masterfully. There is no guarantee that Apple will be able to do that in the future. It is not out of the question that if it gets really bad between the U.S. and China, the Chinese government may decide to retaliate by making an example of Apple.
• Antitrust and other regulatory concerns are also underestimated. What if Apple is forced to separate its services from the iPhone and other hardware? What if Apple has to compete with an independent app store?
• The smartphone market is saturated. So far Apple has been finding ways to make money by using installment plans, trade-ins and selling services to its users. However, it is conceivable that Apple’s market share significantly declines down the road.
• Apple’s gross margins on hardware may come under pressure.
• So far, Apple is making the transition to services beautifully. However, great companies also make missteps; do you remember IBM IBM, -1.14%, Hewlett Packard HPE, +0.00% HPQ, -1.76%, Nokia NOK, -0.41% and BlackBerry BB, -1.51% ?
What to do now
Investors ought to consider the following factors that call for patience if wanting to start a new Apple position:
• Apple stock is overbought.
• Apple stock is over-owned.
• Sentiment is extremely bullish.
• Investors, for the most part, are ignoring the risks in Apple stock.
The factors above make Apple stock vulnerable to a downswing. Prudent investors who are not in the stock may want to wait patiently for a dip into the Arora buy zone. Of course, those already in the stock may consider continuing to hold.
In the near future, Apple stock may also provide short-term trading opportunities. By surrounding a core position with trade-around positions, as we have done, investors can lower their risks and potentially double their returns.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
