Do you remember the times of Apple product events?
Well, these events still occur – they are just far less exciting.
In earlier times, everyone would tune in to see the next Steve Jobs creation.
Today, those same events are not the same (it’s not Tim Cook’s fault, either).
But many would even say that the product events are downright boring.
But what does “boring” mean for Apple?
Boring simply means that you can skip the next Apple reveal and do something better with your time.
Although, COVID-19 has everyone doing some wild things for “entertainment” these days.
And if watching the reveal of slightly better iPhone, iPad, or streaming services entertains you – then go for it.
What does the boringness mean for Apple.
Or maybe the better question is…
…what is next for Apple stock?
It’s hard for anyone to provide an answer with any certainty.
The company has investors eating out of the palm of its hand at this point.
Is that a good thing?
It is hard to say for sure.
Fortunately, we have got some allies on our side.
Those allies are Tom and David Gardner with the Motley Fool.
We believe the Motley Fool has an idea of what is next for Apple.
Why should you listen to the Motley Fool?
Because David Gardner recommended Apple stock back in 2008!
Did you see Apple’s success coming?
Maybe. Maybe not.
Apple seems like surefire winner today…
…but the company had not yet released the iPhone in 2008.
Once Apple released the iPhone, it was off to the races.
However, Apple is not the same company it was five years ago, much less twelve years ago.
In 2020, Apple no longer views the iPhone as its primary driver of revenue in the future.
This has some people skeptical about Apple’s long-term viability.
On the other hand, many investors think Apple is here to stay.
What do you think?
Don’t be so quick to answer.
Today, we are going to ponder whether Apple is a “buy” today.
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What is next for Apple?
You may be wondering which direction Apple is headed toward.
Many investors are skeptical whether Apple has another climb left in the tank.
This consideration is especially important ahead of Apple’s 4-for-1 stock split later this month.
So, let’s take a look at the company’s recent history.
Apple became a $1 trillion company back in 2018.
At the time (two long years ago), crossing this threshold was an incredible feat.
However, investors could not have fathomed that Apple would add another $1 trillion to its value over the following two years…
…but it just happened.
Apple made headlines in August 2020 after becoming the first U.S. public company to achieve a $2 trillion market cap.
The company even beat out the likes of Amazon and Microsoft, with a $1.65 trillion and $1.59 trillion valuation, respectively.
The stock is up 133% over the past 12 months and has garnered even more attention from individual investors.
These gains include 59% in 2020 (so far), and 86% in 2019.
For some people, these numbers mean STAY AWAY.
For other people, these numbers represent expected success now, and in the future.
There is no doubt Apple has momentum on its side.
Momentum is on Apple’s side…
It’s no secret that Apple’s services business is growing rapidly.
So, what does the service business include?
It includes revenue generated from third-party app sales and subscriptions.
These services include iTunes, the App Store, Apple Music, Apple TV, Apple Pay, AppleCare, iCloud, and much more.
With COVID-19, Apple saw a surge in users of the company's many services (because we need to entertain ourselves somehow).
Additionally, there is advertising in the App Store and other recurring revenue streams.
The profitable segment appears to be poised to grow at double-growth rates for years to come.
This particular segment boasts a much higher gross profit margin than Apple’s product sales.
Additionally, the service sales are recurring, making these sales more dependable than others.
Not only are these sales dependable, but they make Apple less dependent on new product launches.
As the service business grows, investors are willing to pay a higher premium for Apple’s earnings.
Here is a breakdown of why investors are flocking to Apple:
- Services revenue is growing. Total services revenue increased 15% year over year in fiscal Q3 versus product revenue of 10%.
- The segment has strong growth margin. In fiscal Q3, the segments growth margin was 67% compared to the products’ gross margin of 30%.
- Services revenue is becoming more important. The segment accounted for 39% of fiscal Q3’s total gross profit versus 36% one year ago.
As you can see, the segment is growing, and with a higher profit margin than the product revenue streams.
So, what does this mean?
Apple’s services revenue streams can help drive significant growth for the company in years to come.
Let’s discuss Apple’s impressive valuation…
The momentum is certainly on Apple’s side.
However, one must carefully consider…
…is Apple a “buy” right now?
The momentum is promising, and the services revenue appears strong.
Regardless, the $2 trillion valuation is becoming difficult to justify.
We are not completely ready to call Apple a definite buy today.
Apple now has a price-to-earnings ratio of 37.
To quantify this figure, Apple would need to grow its earnings per share (EPS) between 13% and 15% annual for the next five years.
After those five years, the company would need to continue to grow at a similarly rapid pace.
Analysts have the stock averaging compound earnings-per-share growth of around 12.5% over the next five years.
While the $2 trillion valuation may seem exciting, it is important to remember that it means nothing.
Is Apple stock a buy?
We said we weren't sure if Apple would be a buy today.
Apple has many things going for it.
For starters, Apple’s ascent has been extraordinary.
Let’s face it – the $2 trillion market cap is not cheap…
…but in today’s day and age, it’s also not insane.
The same factors that propelled the company to a $2 trillion valuation may be what keeps the needle moving on future success.
The tech company’s ability to leverage its user-base to generate significant revenue and income will help the company continue its success.
However, if you think the iPhone 12 will be a disappointment, then you should sell.
If you think the services revenue will come to a grinding halt, then you should sell.
Or you could listen to the guys who recommended Apple stock back in 2008.
I am not sure you about, but when one of the BEST growth investors gives me a trading tip — I take it!
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