Will Apple's share price continue to soar in 2020?

The trillion-dollar company surpassed the market cap of the entire US energy sector this month and its share price is up 66% this year

The Apple store on 5th Avenue in New York. Bank of America Merrill Lynch analysts said the company's stock is 'on course for [an] 82.6 per cent gain' for 2019. Photo: Reuters

Since going public in 1980, Apple has become the world's first trillion-dollar company – a feat it achieved in August last year. Therefore, it was no surprise to see the company's market capitalisation – the total value of its stock shares – overtake that of the entire US energy sector earlier this month.

The tech stalwart closed with a $1.17 trillion (Dh4.11tn) market cap on November 14, thanks to a post-earnings surge, while the S&P 500 Energy index’s market cap dropped to a cumulative $1.13tn. That includes giants such as Exxon Mobil, with a market cap of close to $290 billion, and Chevron at around $220bn, as well as 26 smaller companies, such as ConocoPhillips and Schlumberger.

Apple's stock price has soared more than 66 per cent year to date to above $260 from around $158. The company is "on course for 82.6 per cent gain" for the year, according to a November 14 research note from Bank of America Merrill Lynch analysts.

The fact Apple is now worth more than the US energy sector is perhaps not significant in itself as “Apple’s market cap is bigger than a lot of things”, says Noah Hamman, chief executive of AdvisorShares Investments in the US.

But Apple’s success in market cap terms brings up some key questions: can the company sustain the growth in its stock value? Are tech stocks, such as Facebook, Amazon, Apple, Netflix and Google (collectively known as FAANG), overvalued? And what does that mean for investors?

For Apple to go up by around 85 per cent again in 2020 the market cap would have to rise by $1tn.

While there is optimism that Apple’s stock is a stable buy over the long term, there is concern the valuation is slightly overstretched.

“At the current valuation Apple needs to convince that a new upcycle of profits is coming,” says Russ Mould, investment research director at AJ Bell in the UK. “Apple has added around $550bn to its market cap since the January low even though earnings forecasts have advanced only modestly … That is a lot and earnings growth now needs to accelerate and catch up.”

In January, Apple shares lost more than 9 per cent of their value after the company said in its first revenue warning since 2002, it was being badly affected by weaker growth, particularly due to the US-China trade war.

The stock price has recovered since then and Apple’s earnings in its fiscal fourth quarter, which ended in September, topped Wall Street’s estimates for both revenue and profit as its wearable products and digital services offset slowing iPhone sales.

Net iPhone sales decreased year-on-year to $142.38bn from $164.88bn, while services increased to $46.29bn from $39.75bn and wearables increased to $24.48bn from $17.38bn.

Still, total revenue decreased to $265.59bn from $260.17bn, prompting some analysts to say other revenue streams will not be enough to make up for lower iPhone sales in the next year. Net sales decreased most notably in China, to $43.68bn from $51.94bn.

The new Series 5 Apple Watch. Revenue from wearables increased in the fiscal year, but it may not be enough to offset slowing iPhone sales. Photo: Reuters

US investment banking company Maxim Group downgraded its Apple stock recommendation from "hold" to "sell" this month with analyst Nehal Chokshi is forecasting weakness in both iPhone sales and average selling prices. In a research note to clients, Maxim said survey data suggests iPhone revenue will fall 5 per cent and operating profits will decline 2 per cent year-on-year in Apple's fiscal 2020.

Maxim is the sixth company to recommend selling the stock this year, according to Bloomberg data, compared with 27 companies with a buy rating and 15 with a hold view. Maxim established a $190 price target on the stock, implying a downside of about 30 per cent from this year’s high.

Meanwhile, JPMorgan Chase analyst Samik Chatterjee and Wedbush analyst Dan Ives bumped up their price targets to $290 and $325, respectively.

Mr Chatterjee said investors have overlooked the potential of Apple’s advertising income, which he said could increase by more than five fold to $11bn annually by 2025. Mr Ives wrote in a note to clients, “we believe the tech stalwart is still in the midst of a renaissance of iPhone growth heading into 2020 that will further catalyse the stock higher”.

Mr Hamman of AdvisorShares says apps, services and entertainment content give Apple "opportunity ahead, but also much more competition ahead".

He says: “I’m not concerned about market cap as much as revenue growth, expense growth and competition.”

"Market cap is the reflection of investor appetite and not the other way around," says Salah Shamma, head of investment for Mena equities at Franklin Templeton Middle East. Apple's valuation suggests the market is expecting the company's "dominant position as a manufacturer, service provider and technology innovator to continue to prevail in this current environment".

As for tech stocks in general, Goldman Sachs sounded the alarm in June that sky-high valuations and increasing regulations could become a problem.

“Rising market concentration and the political landscape suggest that regulatory risk will persist and could eventually weigh on company fundamentals,” David Kostin, Goldman’s chief US equity strategist, said in a note to clients. “The valuation premium for growth is elevated today relative to history; software in particular now carries the highest multiples since the tech bubble.”

Following the dot-com crash in 2000, blue-chip technology stocks like Cisco, Intel and Oracle lost more than 80 per cent of their value. Today, of the top 10 companies by market valuation, seven could be considered tech-related: Apple, Microsoft, Alphabet, Amazon, Facebook, Alibaba and Tencent.

Mr Hamman says he thinks some tech stocks are or are close to being overvalued. Apple may fit into that category, as it struggles with revenue growth and faces challenges growing in China.

“The danger is, if you are putting money to work today, you might be in a similar situation that Cisco and Intel both saw in the 2000 tech bubble,” Mr Hamman says. “That has been dead money for 20 years. If I am putting new money to work, I’m not sure Apple ([or even Amazon is the best option for that money over the next 10 years.”

Vijay Valecha, chief investment officer at Century Financial in Dubai, disagrees. He believes certain tech companies, such as Amazon and Netflix, are "probably extremely overvalued" because of increasing competition and the ease of entry into that space – but not Apple. "Apple is still capturing new markets, it is still coming up with new products, and so it is a stock that you can hold for a long period of time," says Mr Valecha. "I recommend Apple to be at least 3.5 to 4.5 per cent of your portfolio size."

One of the biggest fans of Apple shares is Warren Buffett, whose investment company Berkshire Hathway is Apple's third biggest shareholder, behind Vanguard and Blackrock. Berkshire holds more than 248.8 million shares in the tech company, currently above $65bn.

As analysts increase and decrease stock price estimates, the consensus seems to be that Apple is a relatively safe long-term bet – but don’t expect the upward trajectory to continue at the same pace next year.

“For Apple to go up by around 85 per cent again in 2020 the market cap would have to rise by $1tn,” says Mr Mould. “It’s pretty tough to see even a company as well run and well positioned as Apple to generate enough additional profit to justify that in a year, so it would be unwise to expect a similar investment gain bonanza from the stock in 2020.”