Apple’s future is not tied to the iPhone, this investor says

Apple (Apple Stock Quote, Chart, News NASDAQ:AAPL) has been a killer stock to own in 2020 and shareholders should be holding onto it for the long term, says portfolio manager Shane Obata, who thinks the company’s future will be tied to its wearable products like the Apple Watch.

Tuesday is launch day for the new iPhone, a yearly event which this time around holds the promise of a big sales period ahead for Apple, whose iPhone 12 will in some cases be enabled for the next generation 5G networks currently being rolled out across Canada and around the world.

Apple is reportedly delivering four versions of the iconic handset of varying size and capabilities, including the iPhone Mini with a 5.4-inch screen all the way up to the Pro Max which at 6.7 inches will be the largest iteration of the iPhone.

Apple typically reveals new versions of the iPhone in September but this year it moved the date back a few weeks and stuck with the release of new Apple Watches and iPads last month.

The stock has performed exceptionally in 2020, a year in which a number of tech giants have delivered solid gains. AAPL is currently up almost 70 per cent year-to-date, which puts it in the too-pricey category according to Obata of Middlefield Capital, who thinks investors should wait for a better entry price.

“It’s easier for us to recommend holding it if you already own it than it is to buy new today but we still like Apple for the long term,” said Obata, speaking on BNN Bloomberg on Friday. “The recent pullback was around 14 per cent from the recent highs and that helped to improve the valuation a little bit but the stock is still pretty expensive but we’ve been well served with Apple and we like this name for the very long term.” “The iPhone is still very important to Apple and we think they’ll continue to have periodic updates. We’re going to see new 5G phones coming out and I think that the iPhone business is going to rebound significantly next year, with the potential for the 5G phones to actually shorten the replacement cycle. But the areas that have really been growing quickly and that are most interesting to us are wearables, the Apple Watch and air pods and whatnot and also the Services side of the business which includes the App Store,” Obata said.

“Those areas are going to continue to grow in excess of ten per cent per year on the revenue side for the foreseeable future, and we think that’s where people should stay focused for innovation coming from Apple,” Obata said.

Apple’s revenue, which was up 11 per cent year-over-year during its latest quarter, the company’s third quarter 2020 delivered in July, gets broken down by product category and nowadays has iPhone sales dwarfing other segments. For the Q3 2020, Apple posted sales of $26.42 billion for the iPhone, $7.08 billion for the Mac, $6.58 billion for the iPad and $6.45 billion for Wearables, Home and Accessories products. The company’s Services segment revenue was up 15 per cent for the third quarter, coming in at $13.16 billion.

Along with a growth in Services and Wearables, Obata said Apple’s continuing strength lies in its huge user base.

“We really like companies that have an ecosystem of products and Apple has very devoted users that use it for cloud storage, for music, for TV, for phones and the list goes on,” Obata said. “Apple has 1.5 billion active devices —it’s almost impossible to put a value on that kind of network.”

“You can keep customers happy and you can test new products into that giant base,” he said, “so it’s definitely a great long term story would we like to add to it a little bit cheaper.”

But it’s clear that the iPhone still has the power to move AAPL on its own. The movement on Apple shares Monday was the most dramatic since mid-July and many analysts say it is with good reason, as this is one of the biggest upgrade cycles the company has ever had for the product.

“With our estimation that 350 million of 950 million iPhones worldwide are currently in the window of an upgrade opportunity, we believe this will translate into an unprecedented upgrade cycle for Cook & Co,” analysts at Wedbush Securities wrote.

Others agree.

“We expect this fall’s launch to be the most significant iPhone event in years,” Morgan Stanley analyst Katy Huberty said Monday.

But the street is not exactly in a consensus about the bull story for famed Cupertino-based company.

Short interest in Apple shares has moved in lockstep with the iPhone 12 event, with shorters now betting $10.8 billion against the company’s success. That puts it behind Tesla and Alibaba and among the most shorted stocks on Wall Street.

But that, of course, means that the stock could be spurred by a short cover rally.

“If AAPL stock rallies on good news we should expect a wave of short covering and shares shorted trend back down towards the 76 million share level we saw in early September,” S3 Partners analyst Ihor Dusaniwsky argued this week.