Apple Stock Is Up 50% This Year. What’s Going On?

Apple (NASDAQ: AAPL) stock is up by over 50% this year, despite the fact that the company has seen limited growth. Revenues rose less than 5% for most of the last eight quarters, the exceptions being the 9% growth posted in Q1 FY’20 due to a favorable year-over-year comparison and 11% in Q3 FY’20 when demand saw a Covid-19 related bump. So why is the stock surging? Could Apple stock see a correction? Are investors in for a period of diminished returns from Apple over the next few years? We answer some of these questions below.

What’s Driving Apple’s Stock Price Appreciation?

Apple added about $31 billion in total revenue between FY’17 and FY’19 (fiscal year ends in September), marking an increase of 13.5% over two years. Margins remained almost flat at 21% – producing about $7 billion in incremental profits. Investors, however, have valued these profits more richly, with Apple’s trailing P/E multiple expanding from about 18x at the end of 2017 to about 38x trailing earnings and 35x projected earnings presently. We think there are three broad trends driving Apple’s multiple expansion, namely the pending launch of the 5G iPhone, strong services growth, and a possibility that Apple is being viewed as a “safe-haven” stock through the current economic turmoil.

Our dashboard Why Is Apple Stock Up 3x breaks down the key drivers of Apple’s growth.

What Returns Can Investors Expect Going Forward?

Let’s think about what Apple could look like by 2025. If Revenues grow by about 40% between FY’20 and FY’25 (average growth of 7% per year, slightly ahead of the 6.5% average annual growth rate seen over the last 2 years), driven by the launch of 5G iPhones, growth of services such as Apple TV+ streaming and other products such as the AirPods, total revenues could rise from around $273 billion to about $384 billion. Now if Net Margins rose by about 150 basis points (1.5%) to around 22.5%, driven by more proprietary components on devices and a higher mix of services, Apple’s Net Income would grow by roughly 50% to $86 billion.

Now, what about Apple’s multiple? We think it’s unlikely that Apple would command the 35x multiple it presently does in 2025 for a couple of reasons. Firstly, it’s quite likely that interest rates will increase by 2025, and this could translate into weaker valuations for the broader equity markets. The “safe-haven”  premium for Apple may also diminish as the economy gets better. Apple’s Services business – which is coming under some anti-trust scrutiny could also see growth cool. Considering this, we believe a multiple of about 28x is likely to be fair for 2025. (For perspective, Apple’s average P/E ratio over the last 10 years was roughly 16x)

Valuing Apple’s projected $86 billion in Net Profits at about 28x would imply a market cap of about $2.4 trillion by 2025. While this does translate into a $400 billion increase from Apple’s current market cap of close to $2 trillion, the incremental gains in market value will be much more limited, at about 20% over the next 5 years – or only about 4% per year. Sure, Apple’s buybacks and dividends will augment these returns for investors, but it’s probably reasonable to expect diminishing returns from Apple in the coming years.

Of course, Apple’s Services business is a big driver of its value, but which specific services are really driving growth? Our dashboard Breaking Down Apple’s Services Revenue estimates the numbers for AppStore, Apple Music, Apple TV+, iCloud, Third-party Subscriptions, Licensing, Apple Care, and Apple Pay.

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