Apple share price exceeds US$300 for the first time: where next?

US technology device maker Apple Inc. (NASDAQ: AAPL) has kicked off 2020 with a bang, as its share price crossed the US$300 mark on the year’s very first trading day (02 January).

Share price rose as much as 2.3% on the day to close out at US$300.35 per share on a split-adjusted basis, an all-time high for the iPhone maker since its debut on the Nasdaq exchange 40 years ago.

This strong start continues the good run of form that Apple was able to enjoy throughout 2019, during which stock value gained 86%, the highest among the FAANG (Facebook, Amazon, Apple, Netflix, and Google) gang. It was the company’s best year in terms of growth in a decade. In 2018, stock value declined over six percent.

Increased investor confidence on back of higher product sales

Besides rising share price, short share volume – the total number of short shares traded in a day – has also been falling, indicating a more bullish sentiment. According to Nasdaq, many investors believe that a high number of short interest positions reflect a bearish sentiment, and vice versa.

This bout of investor optimism had mostly been predicated on the technology company’s solid product sales in the last 12 months. According to US market analyst Daniel Ives, Apple sold more gadgets to consumers in 2019 than any other company.

The iPhone – the company’s flagship device – was once again the top selling technology product of 2019 with 185 million units sold, according to a new list compiled by Wedbush Securities.

Apple’s other product lines, namely Airpods, iPad, and Apple Watch, also made the top six. Each achieved estimated sales of 65 million, 45 million, and 25 million, respectively.

So popular were its products that it was reported that its supply chain was unable to meet the overwhelming demand this past holiday season for the Airpods Pros, the higher-quality and higher-priced version of the Airpods wireless earphones. According to Apple, the Airpods pro is currently sold out through January 29.

It was further reported in December 2019 that global shipments of the Airpods for the year were on track to doubling that of 2018.

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Source: NASDAQ

Is US$400 per share reasonable?

Ives noted that the good performance was despite the fact that there were no brand-new product lines last year. Instead, he said the company had kept revenues up by tightening its grip on existing users through selling more services via apps, music, movies, and software products.

‘That's been the formula for success, and it's why the stock is up,’ he said. ‘This is one of (Apple CEO) Tim Cook's finest hours, putting a fence around their install base.’

And it seems like share price is heading for even higher ground, with industry observers predicting the launch of five new phone models this year, as well as an estimated five billion US dollar investment toward Apple TV content.

One of them is Loop Ventures Managing Partner Gene Munster, who believes Apple shares ‘can be a US$350 or US$400 stock over the next year’.

‘If you look at Apple’s valuation in the current earnings multiple, it’s still low relative to other tech companies,’ he told CNBC. ‘If you apply a Facebook multiple to Apple stock, it’s a US$400 stock.’

Apple stocks ‘overvalued’

While product sales are a good indicator of how well a company is doing, the main driver of stock price performance ‘is likely to be whether (Apple) can exceed its four percent revenue growth target for the quarter and boost its forecast’, wrote Forbes equities analyst Peter Cohan.

He stated that with such a small growth target and a current PEG (price/earnings to growth) ratio of 2.5, based on a price-earnings ratio of about 24.7, Apple shares are ‘considerably overvalued’. A PEG ratio above 1.0 is generally considered unfavourable.

Cohan further noted that while overall product sales across the board are still healthy, iPhone sales for 2019 fell nine percent from 2018. Profit also dropped for the fourth consecutive quarter by 3.1% in Q4 of 2019.

He concluded that he would only consider buying Apple shares if prices fell by 59% to US$122 per share, which would give it a price-earnings ratio of 10, making it on par with its five-year earnings growth rate.

Paul Meeks, a portfolio manager at Independent Solutions Wealth Management, is also of the opinion that Apple shares are overpriced – by at least US$120.

“People are excited, perhaps too much so, as the company transitions from a hardware product iPhone-dominated company to…a Software as a Service company,’ he said, adding that he values the company at US$170 per share, and would only buy new stocks if prices fall by at least 40%.

‘The iPhone business continues to deteriorate…(It’s) very akin to the slowdown in maturity that we saw in the PC market as we kind of went from the ’80s to the ’90s,’ Meeks noted.

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