Apple’s earnings show that the company has the potential to transition from operating systems for phones to becoming the operating system of life for the affluent.
If that scenario happens, Apple’s stock AAPL, +2.92% — even having rallied sufficiently post-earnings to secure a trillion-dollar market cap — can go much higher than anybody is talking about. The Arora Report bought Apple stock for the long term at $18.73 and is still holding it. At that time, I talked about a scenario of a $143 target ($1,000 pre-split of 7:1), and everybody complained that my analysis was flawed.
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.Read: Apple earnings show why you can expect more $1,000 iPhones
In the short term, Apple’s earnings beat not only the consensus but also the whisper numbers. Stocks move based on the difference between the reported earnings and projections compared to the whisper numbers. Before exploring the key fundamental aspects, let’s start with a chart.
ChartPlease click here for an annotated chart of Apple. Please observe the following from the chart:
• Apple was set to become a $1 trillion company when the stock reached about $207.
• The chart shows the technical breakout occurring after the earnings report.
• The chart shows the prior breakout attempt.
• The chart shows that the prior breakout attempt failed.
• The chart shows that Apple did not retrace the big move as other tech stocks such as Facebook FB, +2.75% , Amazon AMZN, +2.07% , Netflix NFLX, +1.81% , Google GOOG, +0.50% GOOGL, +0.66% and Twitter TWTR, +2.85% faltered. To learn the one thing that prudent investors need to know before making buy or sell decisions on these stocks, please click here.
• The relative strength index (RSI) shows there is more room to run.
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Longstanding predictionApple has traditionally garnered a relatively lower price-to-earnings (P/E) ratio because of its heavy dependence on the iPhone. The Arora Report has long predicted that Apple will start getting a higher P/E when its service revenue reaches 20% of total revenue.
I’ve been watching services revenue for years now, and have anticipated the 20% milestone. The Arora Report’s call is that Apple will reach that 20% target over the next two to three years.
Apple is looking to expand its services business in emerging markets.
Services’ valueIn the Arora Report analysis, the service segment of Apple is already worth about $80 per share. In the latest quarter, Apple reported $9.55 billion in services revenue vs. $9.21 billion consensus. This is an increase of 31% over the same quarter last year.
Operating systemAs Apple introduces more services for entertainment, for the home and for cars, it has the potential to transition from an operating system for the phone to an operating system of life. In Apple’s tradition of skimming profits from the top by catering to the affluent, Apple is likely to generate more profits from new services compared to competitors.
When Wall Street starts understanding the transition, Apple’s stock is likely to move up to the Arora Report target zone of $240 to $250.
Trade-war riskApple seems to be navigating the trade-war risk well. However, this risk should not be ignored. This is one of the reasons behind the position size of Apple stock in the Arora Report portfolio. It is important for all investors to properly size their positions.
What to do nowThe Arora Report’s call is to continue to hold a core position in Apple and trade around the core position to add extra returns. We have often doubled returns by systematically executing this strategy of trade-around positions. We offer different ways to invest, including the “good way” and the “best way.” For those following the good way and not in Apple stock, the “buy now” rating is “yes,” preferably on a small pullback. For those not in the stock and following the best way, consider patiently waiting to buy on a dip into the buy zone. Size your Apple stock position correctly, with the trade-war risk in mind.
Facebook, AmazonMany investors are grappling with the question of what to do now with Facebook and Amazon.
To see the answer for Facebook’s stock, read: How low will Facebook’s stock fall before it rebounds to more than $300?
To see the answer for Amazon’s stock, see: Amazon investors: Forget the headlines and focus on this one thing
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. 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.
