While work-from-home stocks like Zoom Video and Peloton Interactive may have been getting much of the attention in financial media as the highfliers of the current market rebound, the world's most valuable publicly traded company has been regularly hitting new all-time highs as well. Apple (AAPL 0.40%) now has a market capitalization of $1.65 trillion, with shares trading above $380. To get here, the stock had to rise about 90% over the past 12 months and 30% in 2020 alone.
With the tech stock climbing so much, many shareholders may be on edge, wondering if they should book their profits. On the flip side, the stock's strong price action may have attracted some new investors who are wondering whether there's still upside ahead for the tech giant.
Here's a close look at Apple stock -- and what investors should make of it today.
Apple senior vice president of software engineering Craig Federighi. Image source: Apple.
Why are investors so bullish on Apple stock?
One key reason Apple stock is trading higher recently is simply the underlying market optimism for tech stocks in the aftermath of lockdowns. This unique environment has made technology more mission-critical for organizations and more relevant for consumers, prompting investors to turn to tech stocks like Apple as somewhat of a safe haven. But there are also three main company-specific reasons that have investors bidding up shares of Apple.
First, some investors seem hopeful that the company's next iPhone will launch to pent-up demand for 5G connectivity -- a feature the upcoming iPhone is rumored to have. This could help the iPhone segment return to the revenue growth it was seeing before coronavirus lockdowns squeezed iPhone demand and supply earlier this year.
Second, the company's wearables business is taking off, driven by fast-growing sales of Apple Watch and AirPods. This important segment saw record revenue of $6.3 billion in the second quarter of fiscal 2020. While this was small relative to $58.3 billion in total revenue during the period, sales in the segment grew faster than any other, rising 23% year over year.
Last, and probably most important, is Apple's rapidly growing services business. The tech giant's services business is its second-largest segment (after iPhone), accounting for 23% of total revenue in the company's most recent quarter. The segment is not only growing faster than Apple's overall business, but it sports a gross profit margin about twice as high as that of the company's hardware sales. This fast-growing, highly profitable recurring revenue stream has convinced investors that the stock should trade at a higher multiple than when the business was more dependent on less predictable, lower-margin hardware sales.
What needs to happen for shares to keep rising
With Apple stock now sporting a price-to-earnings ratio of 30, investors have essentially priced in 10%-plus annualized earnings-per-share growth for years to come. To fuel this bottom-line growth, investors should look for Apple's wearables and services businesses to continue growing at strong double-digit rates. Further, investors should look for iPhone revenue to return to growth sometime in fiscal 2021, following the launch of the rumored 5G iPhone.
So, can the stock continue rising from here? While it's impossible to know what the stock will do in the near term, things look promising for investors willing to hold for the long haul. There's a good chance Apple can execute on these fronts given both its long track record of consistently pleasing its customer base with new and exciting products and its recent strong momentum in services and wearables.
