Why Apple shares may rise further after doubling in past year

January 15, 2020 13:45
Apple's shares have doubled in the past year and the outlook for 2020 is seen positive as the firm prepares to roll out a 5G device. Photo: Reuters

Apple has seen its share price climb steadily in 2019 as investors bet on the next round of iPhone upgrade cycle due later this year when the firm is expected to launch a 5G-compatible device. The momentum continued into the first two weeks of 2020, but what can we expect going forward? Is there any reason to support the stock further?

On Tuesday, Apple closed at US$312.38, yielding a market capitalization of US$1.37 trillion. The stock was up more than 12 percent in the past month, and is now double compared to its level in early January 2019. Many institutional investors have revised up their targets on Apple to reflect a bullish sentiment. 

Apple will announce its quarterly results on January 28, which will provide insights on sales of iPhones, iPads and Apple smartwatches during the holiday season. Market talk suggests that the new iPhone 11 series could perform better than its predecessor iPhone XS series and XR, thanks to a flexible pricing strategy to make the entry-level iPhone 11 an affordable model for the mass market.

One of the reasons for investors to feel optimistic about Apple is that iPhone sales in China saw significant improvement.

Data from the China Academy of Information and Communications Technology showed that Apple shipped around 3.2 million iPhones in China in December, up from 2.7 million units in the same period the previous year. Throughout 2019, Apple offered discounts and financing schemes aimed at boosting sales in China, a Reuters report has noted.

Despite stiff competition from Huawei, which got a boost as many Chinese people embraced the domestic brand in a show of support amid the US trade war and sanctions on the Chinese firm, Apple managed to improve its prospects amid its premium market positioning.

Some observers have noted that Apple's new flexible pricing strategy can help lure more Android users to the Apple camp for a taste of the iPhone. Such change could get a boost in the 5G era as people upgrade their existing smartphones to enjoy the latest technology.

Tech-savvy consumers in China may opt for an Apple handset rather than a Xiaomi and Huawei device to enjoy a superior experience with the new-generation wireless technology.

Apple has been trying to reduce its reliance on the iPhone, yet the product still accounts for more than 60 percent of the firm's total sales. There has been an increased focus on the services business, but the hardware segment remains the crucial backbone.

To fill a gap in its portfolio, Apple is reportedly planning to launch a cheap iPhone in March as a successor of the SE handset to tap the mid-range market. The model could come with the latest Apple processor and would target the old iPhone users who prefer smaller screens. Such a product, if it is priced below US$400, can help Apple explore a new revenue stream.

Apart from iPhone, wearables business is a key growth engine for Apple, driven by strong demand for AirPods wireless earbuds and the Apple Watch. Strategy Analytics has noted in a report on the headset market that Apple is at the top with a market share of more than 50 percent, with Xiaomi and Samsung in the second and third positions respectively.

It is no surprise that Apple has the largest market share, given that the US tech giant effectively created the category with the launch of the AirPods in 2016. Apple’s AirPods are the dominant Bluetooth headset in terms of sales volumes and revenues in the wearable sector. The Cupertino, California-based firm could continue to dominate the category until at least the middle of this decade.

Also, Apple Watch has been the leader in the smartwatch market as its health monitoring feature is recognized by medical professionals.

Apart from hardware business, investors are also optimistic about the company's services segment, which includes the App Store, Apple Music and the newly launched video streaming service. Apple's services revenue in fiscal 2019 was US$46.3 billion, up from US$39.8 billion in the previous financial year. The segment, actually, fared much better than Apple's product revenue.

Services business now accounts for 18 percent of Apple's total annual revenue. New services launched last year including Apple News+, Apple Card, Apple Arcade, and Apple TV+ could have a meaningful impact on results in fiscal 2020.

Apple is still a hardware-driven company, but its service offerings -- under which it bundles a series of content as well as a payments service -- will encourage customers to stay within the Apple ecosystem. In the near future, the main growth driver will no doubt be the eagerly-awaited 5G iPhone and the potential launch of new services running on the high-speed network.

As investors anticipate more news from Apple, the tech giant's shares could get a further leg-up in the coming months.

-- Contact us at [email protected]

RC

EJ Insight writer