The NASDAQ-100 Technology Sector index has more than doubled the return of the S&P 500 index over both the last one- and five-year periods, but Apple (AAPL 0.68%) has remained among the cream of the crop, surging roughly 84% so far in 2020 and about 405% over the last five years.
Those heady gains put Apple's stock price at a premium valuation of 34 times forward earnings estimates, which looks expensive compared with a forward price-to-earnings multiple of 24 for the S&P 500.
However, Apple is currently entering one of its strongest product cycles in years, which could keep the business humming along and justify the stock's premium. Here are three growth catalysts to watch in 2021.
1. Product sales could hit records in 2021
Apple enters the new year after delivering a strong earnings report for the fiscal fourth quarter. While iPhone revenue was slightly down in fiscal 2020, sales of non-iPhone products grew 30% year over year despite supply constraints on iPad, Mac, and Apple Watch. That momentum should continue into the first half of calendar 2021 with recent product releases.
The new AirPods Max headphones have been sold out since their initial release in December. Other recent launches should provide sales momentum in the short term, including the HomePod mini, Apple Watch Series 6 and Watch SE, two new iPad models, and new MacBooks featuring Apple's internally developed M1 processor.
Early signs are pointing to strong sales of iPhone 12. Even though 5G network coverage is spotty, customers seem to be scooping up the new iPhone at a record clip, which is great news since the iPhone generates half of Apple's total revenue.
Apple is planning to increase its production of the iPhone 12 by 30% in the first half of 2021, according to a report from Nikkei Asia that cited a source from a key Apple supplier. This would put Apple on pace to have its biggest year for iPhone sales since the record-breaking shipments of the iPhone 6 in 2015.
2. Apple's M1 chip is a game-changer
Apple made a bold move earlier this year by announcing a two-year transition to use internally developed processors for its line of Macs, dropping Intel chips in the process. The M1 chip offers several features that will significantly enhance the user experience on Mac and could lead to further market share gains in the PC market for Apple.
For years, Apple has been working to bridge the user experience across its operating system for Mac and iOS. The M1 chip will take this a step further by allowing Mac users to run iPhone and iPad apps. This could be huge for Mac sales over the long term.
By taking control over the development of its own chips, Apple can better plan its product road map and tailor future versions of the M1 for specific user experiences, such as enhanced image processing, security, and other cutting-edge features and technologies.
Apple will likely unveil more benefits of the M1 chip over time, but for 2021, the significant boost to battery life and ability to run iOS apps directly on Mac should be enough to encourage more sales of MacBooks.
3. Services growth
Despite double-digit percentage growth from subscription services, sales of hardware products still make up nearly 80% of Apple's total revenue. But with services growing 16% year over year in the last quarter, this $53 billion annual business could reach $100 billion in the next five years.
After reaching an installed base of 1.5 billion active devices earlier this year, Apple reported that its installed base hit another record high in the fiscal fourth quarter. New services -- including Apple TV+, Arcade, News+, and Apple Card -- are attracting more users, and Apple is still adding new services and content to drive further growth.
Apple TV+ continues to add new streaming content, which will be crucial to persuade users coming off their free trials that it's worth paying the relatively low monthly fee of $4.99.
The recent launch of Apple Fitness+ is yet another service with a lot of potential. Interactive fitness was already a fast-growing market before 2020, but it got an extra kick during the pandemic with more people looking for alternative workout solutions at home. Nike and Peloton Interactive have reported high engagement levels with their respective training apps lately. Apple's massive installed base of users should win a decent share of this booming market.
Plenty of tailwinds heading into 2021
Apple is on the verge of a major upgrade cycle across all its products. Moreover, this upgrade cycle could intensify as COVID-19 vaccines become available, encouraging more people to visit Apple stores as the year progresses.
With these growth catalysts on the horizon for this top tech stock, Apple is well-positioned to outperform in 2021.