Apple will have a stellar 2021, this investor says

Portfolio manager Shane Obata has one thing to say to investors who’d like to get into Apple (Apple Stock Quote, Chart, News, Analysts NASDAQ:AAPL) but are worried about the valuation: hold your nose and buy it.

It’s been a whale of a year for the US tech giants like Alphabet (Alphabet Stock Quote, Chart, News, Analysts NASDAQ:GOOGL), Amazon (Amazon Stock Quote, Chart, News, Analysts NASDAQ:AMZN) and Apple, all of which have posted big numbers in 2020, with Apple leading the pack. Alphabet delivered a return of 30 per cent for the year, whereas Amazon, which sprinted ahead as COVID-19 protocols came into place and e-commerce sales went through the roof, is looking at a 78 per cent return for the year.

But Apple is up 82 per cent for the year, solidifying its place as the best-performer among the FAANGs. As for the others, Facebook (NASDAQ:FB) came in with a return of 33 per cent and Netflix (NASDAQ:NFLX) came in at 63 per cent.

Apple seems to have silenced its critics who in years past worried that the company’s growth was too tied to the iPhone and that product innovation was drying up from the tech giant.

But the talk these days is more about the Apple ecosystem including phones, tablets, applications and services, all linked together as a force greater than its parts. Plus, it doesn’t hurt that iPhone 12 sales are coming in strong. Earlier this month, Japanese financial newspaper the Nikkei reported that Apple aims to produce up to 230 million iPhones in 2021, roughly 20 per cent more than made in 2020, and signaling stronger-than-expected consumer demand for the iPhone 12, which supports the new 5G networks.

Obata says that even with the run-up in Apple’s share price in 2020, it’s still a stock you should be looking at going into 2021.

“Alphabet is actually trading at a more reasonable valuation in my opinion so I think if you’re talking about deploying capital right now then that that would be my gut instinct,” said Obata, portfolio manager at Middlefield Capital, who spoke on BNN Bloomberg on Wednesday.

“That said, we’ve done tremendously well owning Apple and we continue to like the company. It has gotten a little expensive here —it’s definitely trading over a 34 P/E right now so it’s not cheap,” Obata said. “But the the Apple story is still about the ecosystem, it’s still about luxury. These are premium products.”

Obata thinks Apple’s revenue growth will come from a surge in iPhone sales as a major cycle of upgrading is about to occur.

“In terms of innovation, a lot of people have been asking about the new iPhones and what’s new, what’s this new phone going to do [but] I think that’s been the wrong question because we’ve seen innovation on wearables, we’ve seen innovation in services, and these are becoming a bigger part of the business,” Obata said.

“On top of all that, I think we’re really starting the beginning of a serious upgrade cycle in terms of phones. 5G is not available to a lot of people yet —maybe you have some capabilities here and there but until the full network capabilities are built out I don’t think we’ll really get to enjoy that— but I don’t think that really matters for consumers,” he said.

“Consumers have been pushing back the kind of upgrade cycle, [saying], ‘Oh I don’t really need a new phone.’ Well, now you have an excuse. There’s something new and interesting in the market and it’s 5G … and I think that’s enough to get consumers to pay up and I think we’re going to see that reflected in the 2021 numbers,” Obata said.

Stocks in autonomous car technology were boosted last week by a report from Reuters suggesting that Apple’s automotive R&D business, named Project Titan, is building both a battery and the car to go around it, although Apple has not yet commented on the rumour.

CNBC’s Jim Cramer called the autonomous vehicle news one more reason to own Apple. “Hopefully, everyone will forget this story tomorrow and the stock will sell off, giving you another chance to buy into weakness,” Cramer said last week.

“We know Apple likes to disrupt big end markets [and] it doesn’t get any bigger than the auto industry,” Cramer said. “If there’s anyone who can give Tesla a run for the money, it’s Tim Cook and his team at Apple.”

But Obata is more circumspect about Apple’s potential foray into self-driving cars, saying, “I’m not very much excited about that. I’m not exactly sure how that will play out and if it happens — which I don’t think it will — maybe in partnership with someone else, but on the long history of car stocks, specifically, it’s a really tough business.”

“It’s really capitally intensive, it’s lower-margin than Apple’s other business and I just don’t see why they would need to do that,” Obata said.