It's no secret that Apple (NASDAQ:AAPL) has had a great run so far in 2014. Year-to-date, shares of the technology giant are up 43%, versus a much more modest 11% return for the S&P 500 Index. Investors have clearly benefited from a renewed sense of optimism over Apple's recent product releases such as the iPhone 6.
After such tremendous performance this year, you might be asking yourself whether Apple could still have room to run. After all, it's the most valuable company in the world, with a massive $672 billion market capitalization. How could a company this huge possibly keep growing?
Let's take a look at three reasons why, despite its strong performance this year, Apple's stock might continue to rise into the new year.
Earnings likely to soar next year
The first, and most important, reason Apple's rally still has room to run is that earnings growth is projected to be fantastic next year. Currently, analysts expect Apple's fiscal 2015 earnings to come in at $7.73 per share-19% higher than this year's estimated EPS. What this means is that Apple currently trades for 17 times trailing earnings and 15 times forward earnings estimates-cheaper than the S&P 500 despite Apple's stellar growth prospects.
Other high-growth technology stocks are much more aggressively valued than Apple. For example, Google trades for 17.5 times forward EPS expectations, despite the fact that Google has generated just 5.5% growth in diluted earnings from continuing operations over the first nine months of the year. Were Apple to trade for the same earnings multiple and it simply met the average analyst EPS target next year, it would trade for $135 per share, representing a 17% return. Including Apple's dividends over the next four quarters, it's not outlandish to suggest that Apple shareholders may be in for nearly 20% returns next year.
The iPhone 6 will, in all probability, be a smash hit, based on all indications to date. Over the first weekend of sales, Apple sold 10 million iPhone 6 and iPhone 6 Plus devices. This did not even include sales in China, where the newest iteration of the iPhone wasn't even available until October 17.
Apple sold 169 million iPhones last year. Remember that the iPhone 6 was available only for a few weeks in Apple's final fiscal quarter. Based on the hugely successful inaugural weekend, and supply chain information, analysts at J.P. Morgan estimate Apple could sell as many as 235 million iPhones next year. This would represent 39% growth year over year.
Apple is also likely to rack up growth from the Apple Watch, which hasn't hit store shelves yet. Apple will release its first smart watch next year, and analysts are optimistic for its growth prospects. Estimates vary, but analysts with RBC Capital Markets forecast $10 billion in sales for the Apple Watch next year. This would yield 5.5% growth in revenue alone.
And, of course, there are still Apple's other products — including its pay system and the newest version of the iPad — to help boost earnings even further.
1.35 Billion Potential New Customers
China alone is a huge growth opportunity for Apple in itself. In particular, Apple's budding partnership with China Mobile, as well as China Mobile's 4G rollout, are still in their early stages. Apple's revenue grew 17% last year in China, which made it Apple's best-performing geographic region. Because of the huge success of the iPhone in China and elsewhere, it's reasonable to think Apple can crush iPhone sales, thanks to a very easy comparison.
For all the reasons above, investors should fully expect Apple to produce double-digit revenue and earnings growth next year. And, since the stock is still relatively cheap compared to the market as a whole, Apple stock can easily keep climbing next year. And of course, there's the possibility for much more, if Apple can beat earnings expectations going forward, which is not at all a stretch.
Bob Ciura owns shares of Apple. The Motley Fool recommends Apple and Google (A shares). The Motley Fool owns shares of Apple and Google (A shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.