Apple (AAPL) kicked off 2019 by issuing a major sales warning, but ended the year on track to report record December quarter sales and profits and its stock sporting a whopping 86% full-year gain.
And so far at least, the good times have continued in 2020, with shares up another 6% to $310. As a result, Tim Cook's company is now worth $1.36 trillion and trades at forward EPS and free cash flow (FCF) multiples it hasn't seen in a decade.
Specifically, Apple trades for 23.8 times a fiscal 2020 (ends in Sep. 2020) EPS consensus of $13.03 and 20.8 times a fiscal 2020 EPS consensus of $14.95. And Apple's $1.26 trillion enterprise value (market cap minus net cash) is equal to 20 times a fiscal 2020 FCF consensus of $63.1 billion and 18.7 times a fiscal 2021 FCF consensus of $67.3 billion.
What drove such multiple expansion? Outside of a broader tech rally, a few things appear to have been at play:
- Following double-digit revenue declines in Apple's Dec. 2018 and March 2019 quarters, iPhone sales trends have looked markedly better in recent months, which in turn has put Wall Street more at ease about the iPhone franchise's long-term health. Better-than-expected iPhone 11/11 Pro demand has helped stabilize sales, as have improved Chinese demand, revamped trade-in offers and emerging markets price cuts.
- Apple Watch and (especially) AirPods sales have taken off, and are now a legitimate growth engine for Apple. Revenue for Apple's Wearables, Home & Accessories segment rose 54% in Apple's September quarter, and is expected to be up 30% in fiscal 2020 to $31.9 billion (12% of total revenue). Aside from boosting near-term growth expectations for Apple, Watch/AirPods momentum could -- amid reports that Apple is working on an AR/VR headset and lightweight AR glasses -- be fueling hopes that the company can launch additional, successful wearables franchises in time.
- The 2019 launch of several new services offerings -- TV+, News+, Arcade and the Apple Card -- has boosted growth expectations some for Apple's Services revenue, which (aided by solid installed base growth) is still growing at a healthy double-digit clip and is now on a $50 billion-plus annual run rate. Moreover, with Tim Cook hinting that Apple is exploring the launch of subscription-based offerings that would provide hardware upgrades at fixed intervals, there might now be hopes that Apple's Services business will see another major expansion in the near future.
- Markets now seem to better appreciate the fact that Apple has a lot in common with marquee, non-tech, consumer brands with durable franchises and highly loyal customer bases (think Coca-Cola (KO) , Nike (NKE) or Starbucks (SBUX) ). Apple's forward multiples are now similar to many of these companies -- companies which, it should be noted, generally aren't expected to see huge earnings growth in the coming years -- after years of being markedly lower.
Following a year of considerable multiple expansion, odds are good that Apple's stock won't deliver a repeat performance in 2020. Expectations have certainly risen, and as a result, keeping Wall Street happy this year will probably require Apple to both continue delivering strong wearables and services growth, and see reasonably good upgrade activity for its 2020 iPhones, which are expected to pack 5G capabilities and a 3D rear-camera system. And while this year's camera upgrades could be compelling, I think some of the industry hype about 5G's impact on the smartphone user experience has been excessive.
That said, if Apple does the aforementioned things and macro conditions remain good, the company might not see a lot of multiple compression, either. At least not if markets continue to feel that Apple deserves multiples similar to those of a Coke, Nike or Starbucks.
And on the flip side, if Apple can do something that leads EPS and FCF estimates to be meaningfully hiked, such as rolling out well-received hardware/services bundles or further blowing away wearables expectations, its stock could continue rallying in the absence of additional multiple expansion.