Why Apple is a must-own stock for the modern-day investor?

Founded back in 1976 in California, Apple Inc. designs, manufactures and sells iPhones, iPods, iPads, Apple TV, Mac personal computers, Apple Watches, AirPods and HomePod. The company powers these devices by software applications including iOS, macOS, watchOS and tvOS operating systems. Moreover, Apple also provides iCloud, Apple Pay and a variety of other accessories, service and support to its customers globally.

The company sells its products through its retail & online stores and by using a direct sales approach along with third-party cellular wholesalers, retailers, resellers and network carriers.

Apple shares have significantly outperformed the S&P 500 year to date. The company is benefiting from continued momentum in the Services segment, driven by a robust performance of App Store, Apple Music, video, and cloud services. Moreover, Apple devices also continued to gain traction among enterprises, particularly healthcare providers. Although Apple didn’t provide any guidance due to uncertainties triggered by the coronavirus pandemic, it expects fiscal fourth-quarter iPhone sales to benefit from strong demand for iPhone SE. Further, Apple stated that sale of new iPhones will begin a few weeks later against the usual late September. It also expects iPad and Mac to post strong year-over-year growth. Further, Apple Watch and AirPod are other notable drivers in the long haul.

Recent developments, new products & services

One of probably the most important recent developments for Apple was the four-for-one stock split that the company completed on August 31st. The four-for-one stock split did not change the value of any investor’s total holding of Apple, it just grew the number of shares making up that pot. So, if a potential investor had a set amount of money they want to invest in the company, it wouldn’t necessarily matter if they bought before or after the split. The split was mostly designed to help more small retail investors in buying a piece of the company, as not every small investor is able to purchase a $500+ stock.

In general, Apple’s business primarily runs around its flagship iPhone. However, the Services portfolio that includes revenues from cloud services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services now became the cash cow.

Moreover, non-iPhone devices like Apple Watch and AirPod gained significant traction. In fact, Apple dominates the Wearables and Hearables markets due to the growing adoption of Watch and AirPods. Solid uptake of Apple Watch also helped Apple strengthen its presence in the personal health monitoring space.

Apple has established a tradition where every year in September the company announces new products, operating systems thus upgrading its product and services portfolio. This Fall we are expecting to see the new iPhone 12, for which tech experts are saying that it will be the start of a completely new generation of iPhones. The constant innovation and forward looking approach that the company continues to demonstrate have been some of its key growth catalysts. However, the company doesn’t limit its new technology introductions only to the big September event. Going back to the second quarter of last year, Apple released an iPad Air and an updated iPad mini, featuring Apple Pencil compatibility and Retina displays. In the first half of this year the company released its new iPhone SE 2020, which is widely considered to be Apple’s most powerful iPhone, at the lowest respective cost.

Moreover, the company updated its iMac’s compute and graphics performance. Apple also updated its AirPods with the hands-free option “Hey Siri” as well as an option of a wireless charging case.

Apple also announced its subscription-based Apple News+, Apple Arcade, Apple Card, new Apple TV App, Apple TV channels and Apple TV+, which is the company’s latest subscription service providing an over-the-top ad-free video on demand web television service, which debuted on November 1, 2019.

At its debut, Apple TV+ was accessible in 100 countries and different territories, which is quite promising for the service’s expectations and performance for the future. Here it is important to say that analysts working on evaluating the performance of the product and the expectations for the future have been claiming that Apple’s TV+ subscription based service is an advantage over other streaming services, debuting at approximately the same time in a more limited number of countries, such as Disney+, and also because Apple distributes its content through its

own service instead of using third-party licensed content used by better established streaming services, such as Hulu.
Apple’s new TV+ has a goal to expand the company’s service revenues by recurring monthly charge distributed video content, which has been made available widely to the public. Considering the success of Apple’s latest products and the great financial performance the company has kept on showing especially in the past 5 years, we believe the company’s TV+ will be another great service provided by the tech leader, which is expected to increase the company’s revenues and profits, which in turn would boost shareholders’ returns and profits in the future.

Financial performance

We have been closely analyzing the fundamentals surrounding the company especially in the past 5 years. We have already mentioned above Apple’s new products, services and features that are expected to boost the leading technology company’s revenues and profits in the future. By analyzing the company’s financial statements in the past 5 years, we shall say that the tech giant has done a great job – sales and profits have been rising and the company has kept on investing in new projects and coming up with different products, such as new iPhones, MacBook computers, Apple Watches, AirPods, iPads and others. The company comes up with its new products in September each year and we are always very excited to take part of the great upside movement the stock has to offer especially when the new products are being presented to the market at the company’s official event in California. In fact, the share price has the tendency to rise sharply on the same day when the company delivers its new products and we are always interested in participating in these great bullish movements in order to boost our followers’ profitability to the upside.

Going back to the financial statements of the company, we should say that Apple’s sales have been growing annually at around 10-15% in the past 5 years, showing a steady growth and sales figures of around $260-$265 billion in the past 2 years.

The net income of the company has been around $55-$60 billion in the past couple of years, showing a steady net profit margin of around 23%.

Here it is important to say that Apple did an amazing job in the last quarter of 2019. Thanks to the launch of its new products and services already mentioned above, the company has managed to grow its sales by 50% in the last quarter of the year, while its net profit almost doubled. Those results were very promising and gave a reason to believe that the company’s new products will continue to boost its financial performance and thus boost its share price further in 2020. We are making this parallel to last year’s end of year performance of Apple, as the last quarter is usually the strongest quarter for the company and this historically favorable period for the company and its stock respectively is still ahead of us.

In its most recent earnings report for the Q3 of 2020 Apple reported third-quarter fiscal 2020 earnings of $2.58 per share that beat the consensus estimate by 27.1% and increased 18.3% year over year.

Net sales increased 10.9% year over year to $59.69 billion, which also surpassed the consensus estimates by 14.9%. Product sales (78% of sales) increased 9.9% year over year to $46.53 billion. iPad sales of $6.58 billion jumped 31% year over year and accounted for 11% of total sales. Mac sales of $7.08 billion increased 21.6% from the year-ago quarter and accounted for 11.9% of total sales.

Services (22% of sales) revenues grew 14.8% from the year-ago quarter to $13.16 billion.

iPhone sales inched up 1.7% from the year-ago quarter to $26.42 billion and accounted for 44.3% of total sales. The slight year-over-year growth was driven by strong demand in May and June, primarily for iPhone SE. Moreover, continued economic stimulus and phased reopening of some economies globally, helped sales.

Apple quoted a recent survey report from 451 Research, which stated that customer satisfaction was 98% for iPhone 11, iPhone 11 Pro and 11 Pro Max combined in the reported quarter.

Services maintained momentum in the reported quarter. As anticipated, advertising and AppleCare were negatively impacted by coronavirus-led store closures and lower economic activity. This was fully offset by double-digit growth in App Store, Apple Music, video and cloud services. Apple also witnessed strong engagement with iMessage, Siri and FaceTime.

Markedly, Apple achieved its goal of doubling fiscal 2016 services revenues six months ahead of schedule.

Apple now has more than 550 million paid subscribers across its Services portfolio, up 35 million sequentially and 130 million year over year. The company expects to reach its target of 600 million paid subscriptions before the end of calendar 2020.

Furthermore, Apple’s return on equity (RoE) for the most recent quarter was 70.66%, which represented a great increase over the previous two quarters where it delivered a 64.49% and 60.18% ROE respectively.

By looking at the return on assets (RoA) figures, we shall say that Apple has also done an incredible job as the numbers have continued to steadily climb quarter after quarter. The RoA for the 3rd quarter of 2020 was 17.75%, showing an increase from the 17.31% reading from Q2.

Thanks to its great financial performance over the past few years, Apple is currently sitting on tons of cash on hand with its current $193.82 billion, a huge increase compared to its cash figure in 2015, which was “only” $40 billion. In fact, the company has been using its tons of cash in order to buyback some of its shares and further boost its share price and make more money for its investors. Last year, Apple spent $55 billion buying back 283 million shares (at an $194 average price) in open market transactions. Adding this total to $12B of accelerated share repurchases, Apple spent a total of $67 billion on share buyback. To put that total in perspective, it’s more than the market capitalization of 85% of the companies in the S&P 500. Since the company’s stock buyback program was launched back in 2012 the total buyback authorization approved by the executive board is over $460 billion. This is very positive for investors because when the number of shares outstanding decreases, this is positive for the share price because the net profit is being divided by a lower number of shares. Thus, Apple investors benefit because this ends up boosting their profitability in the long term.

It is extremely important to mention also that Apple has kept on beating analysts’ earnings expectations in the past 5 years. In other words, every time the company delivered its quarterly financial reports it has managed to beat analysts’ estimates and has done a better job than expected. Let’s be realistic. This almost never happens. It is extremely hard for any company to keep on beating expectations every quarter year after year. Well, Apple has managed to do that despite all of the speculation by company critiques that iPhone sales have been on the decline and that the company has finally reached its peak. The main reason for the huge success of the company apart from Apple’s amazing products and services, is the loyal customer base that the company has. Every time the company comes up with its new products, Apple customers can’t wait to buy them. We at Dow Experts believe that the combination between brand loyalty and the great ecosystem of products that Apple has managed to create is in the epicenter of the company’s success. There are very few other companies out there that enjoy similar levels of brand support and loyalty from its clients.

Moreover, here it is important to say that while few years ago Apple was mainly dependent on its iPhone sales, the company has managed to evolve, progress and diversify its revenue stream by introducing and successfully selling other products, such as the Apple Watch, Macbook computers, iPads. Thus, even though there was a decline in iPhone sales last year compared to the number of iPhones sold in the previous years, the company has still managed to increase its overall revenues and profitability and has kept on beating analysts’ expectations and driving its share price higher, making more money for its shareholders.

Technical analysis* (all stock prices are adjusted for the 4-1 split)

As we have already stated above, the company has managed to keep on delivering great financial results and that has been extremely positive for its share price performance over the past 5 years.
By looking at the chart, one could see the strong uptrend that the price had been following during that period of time. As a matter of fact, Apple was trading at only $27 per share in the beginning of 2015 whereas just couple of weeks ago after the 4-1 stock split the price was sitting at an all-time high of $137 per share. In other words, it has managed to more than quadruple its investors’ wealth over that period of time.

The technical picture on the chart shows clearly the strong bullish rally that has occurred in the last 5 months taking the price from the March 23rd lows of around $53 to the $137 highs in the beginning of September. This represented a phenomenal 158% appreciation for the stock in the last 5 months. Since then, we have seen a volatile correction that has taken the price down with 16% in the last 2 weeks 2 weeks. The stock is currently sitting at the $115 mark right above the confluence support zone of $110, where we have the strong horizontal support at and the 50 DMA dynamic support at $109. This correction was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it is now more than normal for us to see this downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVI-19, the upcoming presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we expect that the winners will continue to win. We remain bullish on the AAPL stock as long as the stock remains above the $107 level and believe that all these profit-taking corrections are giving us great opportunities to buy the stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent correction and are signaling that the uptrend might be resuming very soon.

We believe that the short-term correction for the stock is almost over and that it will soon resume its uptrend movement. However, if the price manages to break the $107-108 strong support levels, then it would be heading towards the other strong horizontal and psychological support at $100 and the next strong support mark of the 100 DMA around the $96 level . The stock is expected to find lots of buying pressure there, which will inevitably send the price back to the $137 highs.

We will start buying AAPL at the first key diagonal and horizontal support lines currently overlapping around the $110 mark where lots of buying pressure is expected. Should the price break that level to the downside we will be buying more aggressively at the next key support at $99-100 where we will be able to get a better average cost basis for our positions. Our initial profit-taking target is set at $135, followed by the next target at $150 where we will be fully cashing in our profits and waiting for another profit-taking correction that would give us a chance to buy again at a discount

Dow Theory 2.0 – Correlation Confirmation

Dow Experts’ approach has always been based on identifying the next great movement on the market by analyzing the fundamentals as well as technical indicators and all-important factors that have an impact on the price. Furthermore, our cross-correlation analysis could lead to an action if the movement on the chart is confirmed by the other key ETFs and indices that we use in our investing philosophy.

As you know, the Dow Theory 2.0 includes more than 30 correlations between different ETFs and stock market indices, which give us a chance to confirm whether a certain movement on the market is worth taking action for.

Therefore, in order to determine whether Apple is a good buying opportunity around the current levels we have decided to analyze the performance of the XLK (Technology Select Sector SPDR Fund). The XLK is the biggest Technology ETF out there that invests in the biggest players in the tech sector. Apple is XLK’s biggest holding with its current 24.39% weight within the ETF.

By looking at the daily chart, one could see a very similar movement on the XLK, compared to the chart of Apple. Due to the coronavirus outbreak, the XLK had made a 31% correction, dropping from its highs at $103 towards the key support at $70 where it found lots of profit-taking as well as buying interest, leading to an immediate bullish reaction on the price and a reversal. The XLK has been the biggest winner of one of the greatest bull runs in the history of the stock market, as the ETF has appreciated with over 84% in the last 5 months reaching new all-time highs.

Similarly to Apple, the XLK has experienced a volatile correction in the last 2 weeks that has taken the price down with over 11%. The ETF is currently sitting at the $113 mark testing the strong dynamic 50 DMA trendline support at $112.50, which also overlaps with another rather weak horizontal support around the 111 level. This correction was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it is now more than normal for us to see this downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the upcoming presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we see that the winners would most likely continue to win. We remain bullish on the XLK ETF and believe that all these profit-taking corrections are giving us great opportunities to buy the best-performing ETF and some of the stocks in it at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent correction and are signaling that the uptrend might be resuming very soon.

The daily chart shows that the price is currently testing the key 50 DMA dynamic support line at $113, which actually matches with another horizontal support sitting at $111. Considering the fact that two important support levels have already been broken (the 20 DMA and the diagonal trendline support) if we see the price breaking down below the current strong support levels, then we could expect a steeper decline towards the next major horizontal support line at $103 and the 100 DMA at $105 where lots of buying pressure is expected to occur, thus sending the price back to the all-time highs around $127.

Here it is very important for our traders to see that there is a clear convergence between the technical indicators and the chart as well. The chart is forming lower lows, while the indicators are forming higher lows, giving a signal that the huge sell-off has come to its end and it is time to start thinking about buying at the current levels.

Chart: Technology Select Sector SPDR Fund (XLK)

In fact, the XLK clearly confirms our bullish stance on Apple and is signaling a very likely upside reversal and a strong bullish rally from the current levels.

In order to be even more conclusive whether it is a good idea to start buying Apple around the current levels, we have decided to seek a further confirmation from the SPY (SPDR S&P 500 ETF Trust) as the correlation between the XLK and SPY is 94% and it is among the strongest correlations between the different ETFs out there.

Chart: SPDR S&P 500 ETF Trust (SPY)

By looking at the daily chart, one could see a very similar movement on the SPY, compared to both the chart of Apple and XLK. Due to the coronavirus outbreak earlier in the year, the SPY made a 35% correction, dropping from its highs at $339 towards the key support at $221 where it found lots of buying interest, which ultimately led to one of the strongest rebounds in the history of the stock market as the SPY has appreciated with 62% in just 5 months. There has been a lot of speculation and discussion recently on how come the US stock market continues to rally when the US economy is barely trying to survive in the current COVID-19 environment. However, as we know the technical charts reflect the overall fundamental picture and the investors’ sentiment in the market. At the moment, the remarkable and relentless fiscal and monetary support provided by the government and the Fed is acting as a safe net for this highly overbought and overvalued market. The support will continue, but how much longer could the market continue to grow in this environment.

Similarly to Apple and XLK, the SPY has experienced a volatile correction in the last 2 weeks that has taken the price down with around 5-6%. The ETF is currently sitting at the $340 mark after rebounding from the strong dynamic 50 DMA support at $330, which also overlaps with another strong horizontal support positioned at $332. This correction was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it is now more than normal for us to see this downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the upcoming presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we see that the winners would most likely continue to win. We remain bullish on the SPY ETF and believe that all these profit-taking corrections are giving us great opportunities to buy one of the most well diversified ETFs and some of the stocks in it at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent correction and are signaling that the uptrend might be resuming very soon.

SPY’s recent performance is very similar to the one of Apple and the XLK. The price made a 35% correction during the recent sell-off due to the coronavirus outbreak and that led to a huge downside movement from the highs at $340 back in the middle of February to the lows at $220. The daily chart shows that the price failed to break the key support marks at $330. Furthermore, the technical indicators were approaching oversold territory and have already started crossing up from these levels, giving us further bullish indications. Thus, there was an immediate bullish reaction and a huge buying activity at the most recent $330 lows, which led to a strong appreciation towards the current $340 mark. Last but not least, there is a clear convergence between the indicators and the price action on the chart, which clearly confirms our bullish expectations for the future when it comes to the SPY, as well as the XLK and Apple.

Conclusion

In conclusion, after analyzing Apple’s fundamentals, new products and features, recent financial performance, as well as the technical picture and the recent sell-off, followed by an immediate bullish reaction and a confirmation for a lack of further selling activity at those levels, we have been looking for confirmations by the key ETFs where Apple is a key holding in order to get a further confirmation for our bullish stance for the stock in the future. Both XLK and SPY confirm our expectations for a bullish reversal on Apple’s stock. Thus, we will take advantage of the great potential bullish movement expected from the current levels.

We will wait for a short-term correction to the downside from the current levels at $115 and start buying Apple stock at around $109. Should the price drop further in the short to middle term, we will be adding more to our buy positions at the next strong support mark at $100. In case of a further drop in the short-term, we will be interested in buying more aggressively again at the next key support at $89 where the key horizontal and diagonal supports match and a lot of buying activity is expected to take place. That way we will be able to improve our average cost basis and be able to get a better average price on our long holdings on the stock.

As the price starts to reverse back to the upside, we will be interested in collecting our first profits at the $125 mark, just below the resistance at $130 where traders and investors are likely to cash in some profits. Our next profit-taking area is staying at $140 where we will be collecting the majority of our profits, followed by the third profit-taking area at $152 where we will be fully cashing in profits.

We at Dow Experts enjoy analyzing the market and helping our followers maximize their profitability by following our trading and investing ideas, which are always supported by our rational investment approach.

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Sincerely,

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