Has Apple Stock Come Too Far, Too Fast? Maybe Not.
Shares of global technology giant Apple (NASDAQ:AAPL) have come very far, very fast over the past year and change. At the start of 2019, this was a $155 stock. Today, a little over a year later, Apple stock trades hands at roughly $320, more than double its early 2019 price.
That’s a huge jump for a company that big. To put it into perspective, Apple has added $650 billion to its market cap over the past year. Facebook (NASDAQ:FB) — the world’s sixth largest company — has a market cap of $640 billion. So, in about a year, Apple essentially added a Facebook-worth of value to its market cap.
Naturally, some investors think this record rally in Apple stock has come too far, too fast. But, has it?
I don’t think so. Over the past few years, Apple has mastered the art of what Ari Ginsberg, Professor of Entrepreneurship and Management at NYU’s Stern School of Business, calls “incremental innovation,” as opposed to “disruptive innovation.”
“Under the leadership of Steve Jobs, Apple became a famous tech company for harnessing its disruptive innovations to [drive] explosive performance, particularly [in] its iPhone and iPad products,” says Ginsberg. “In contrast, under the leadership of Tim Cook it has become a stable, market-leading company that now continuously adds incremental innovations to their current product lines.”
Given that, the reason to stick with Apple stock on this record rally goes something like this.
In 2020, a bunch of these incremental innovations will converge. As they do, Apple’s software and hardware businesses will fire on all cylinders together for the first time ever. Revenue and profit trends will materially improve. And Apple stock will march higher, especially considering that its valuation still isn’t that full.
Apple Has Mastered Incremental Innovation
There are a lot of pundits out there who have knocked Cook and Apple for not spearheading any new disruptive innovation over the past few years. According to them, this lack of disruptive innovation will eventually catch up to the company.
But, according to Ginsberg, that may not be case.
“[I]ncremental innovation is not always less desirable than disruptive innovation even though it may not produce the blockbuster earnings that radical innovation can drive,” Ginsberg notes. “This is because investments in disruptive innovations are often very expensive and highly risky such that big bets can lead to big losses as opposed to incremental innovations, which are safer.”
Apple is a sterling example of this. The company doesn’t allocate a tremendous portion of its cash or resources to any one project. They sprinkle it across various product and service verticals, gradually enhancing what are already great offerings. Each small enhancement drives higher engagement, reach and sales, and in so doing, generates a nice return for Apple and its shareholders.
See the iPhone and new cameras lenses. Or the company’s expansion into wearables. Or the launch of Apple TV+ and Apple Arcade. These are all incremental innovations, which, when strung together, are keeping Apple on a healthy sales and profit growth trajectory.
Of course, Apple can’t altogether ignore disruptive innovations. And they aren’t. According to Ginsberg, “[C]ompanies need to become ambidextrous, that is good at balancing the timing of exploratory investments in radical innovation with exploitative investments in incremental innovation … [I]t looks like Apple plans to use its “ deepened pockets” to invest in the next round of radical innovations. A notable indicator of this expectation is Apple’s recent acquisition of Xnor.ai as part of the company’s plans to further enable AI on its devices.”
In other words, it appears that Apple has mastered the art of incremental innovation, without forgetting that disruptive innovation is also necessary. This happy medium is what has driven and will continue to drive the price of Apple higher.
Apple Stock Will Keep Marching Higher
Although Apple stock has come very far, very fast, shares will keep marching higher in 2020 because a bunch of incremental innovations will converge and spark a growth renaissance for the company over the next few quarters.
On the hardware side of things, you have the launch of the super low-priced iPhone SE 2 in early 2020. That phone should be a huge hit in emerging markets where smartphone penetration rates are still low, and in which Apple has plenty of room to grow. Later in the year, you will get Apple’s first 5G iPhone, which should be a huge hit everywhere as consumers rush to adopt 5G tech. The most recent Apple Watch Series 5 was a huge hit this holiday season, and demand appears to be ramping into next year’s launch. AirPods are gaining significant sales traction, too.
Meanwhile, on the software side, it’s all about the expansion of Apple TV+ and Apple Arcade. Both of these services were launched in late 2019, so 2020 will be their first full year of operations. In that first full year, both services will likely add significant content to their portfolios, advertise more aggressively to drum up more service awareness, and grow their user bases by leaps and bounds. As they do, Apple’s entire software business will accelerate in its growth trajectory.
Net net, both Apple’s hardware and software businesses will fire on all cylinders in 2020, thanks to a series of incremental innovations. Revenues and profits will move higher. Against that backdrop, a still-not-that-richly valued Apple stock (only 24-times forward earnings) should be able to power higher.
Bottom Line on Apple
Apple stock has come very far, very fast. But, not too far, too fast. This record rally in the stock should persist deep into 2020, as the company’s software and hardware businesses both gain momentum. Until that momentum eases (which won’t happen soon) or valuation friction gets in the way (which isn’t happening yet), the stock will keep going higher.
As of this writing, Luke Lango was long FB.
U.S. may grow more quickly this year than projections: Mnuchin
U.S. Treasury Secretary Steven Mnuchin attends a session at the 50th World Economic Forum (WEF) annual meeting in Davos, Switzerland, January 21, 2020. REUTERS/Denis Balibouse
DAVOS, Switzerland (Reuters) - The U.S. economy may grow faster this year than many projections, U.S. Treasury Secretary Steve Mnuchin said on Tuesday, pointing to the positive impact of trade deals and the possible return of Boeing’s 737 Max aircraft into service.
U.S. growth slowed last year, and the International Monetary fund on Monday predicted a further drop in the coming years, partly due to weaker global trade and the waning effect of fiscal stimulus.
“We’ll hear projections from the IMF and others but I think peoples’ projections are too low for 2020,” Mnuchin told the World Economic Forum in Davos, Switzerland.
Mnuchin argued that business confidence was solid and that recent trade deals with China, Mexico and Canada would boost growth. He added that Boeing possibly resolving problems with its flagship aircraft could also lift the economy.
Mnuchin dismissed arguments that fiscal policy could become a drag on growth, but did admit that the U.S. needs to slow down the increase in spending.
“There is no question, over the next few years, we are going to be have to be careful in looking at slowing down the rate of growth of government spending,” Mnuchin said.
“It’s not necessarily cutting, it’s basically slowing down the rate of growth of government spending,” he added.
When asked about the Federal Reserve’s interest rate policy, Mnuchin would not be drawn. Earlier in the day, President Donald Trump had criticized the Fed, saying he thought it was lowering rates too slowly. Mnuchin said his boss was allowed to critique Fed policy, but he - as Treasury Secretary - was not.
Reporting by Balazs Koranyi and Alessandra Galloni; Editing by Alexander Smith
Is Redrow (LON:RDW) Using Too Much Debt?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Redrow plc (LON:RDW) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Redrow
What Is Redrow's Net Debt?
As you can see below, at the end of June 2019, Redrow had UK£80.0m of debt, up from UK£5.0 a year ago. Click the image for more detail. But it also has UK£204.0m in cash to offset that, meaning it has UK£124.0m net cash.
LSE:RDW Historical Debt, January 28th 2020
More How Strong Is Redrow's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Redrow had liabilities of UK£760.0m due within 12 months and liabilities of UK£259.0m due beyond that. Offsetting this, it had UK£204.0m in cash and UK£47.0m in receivables that were due within 12 months. So its liabilities total UK£768.0m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Redrow is worth UK£2.72b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Redrow also has more cash than debt, so we're pretty confident it can manage its debt safely.
The good news is that Redrow has increased its EBIT by 7.6% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Redrow's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Redrow has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Redrow produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing up
Although Redrow's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£124.0m. So we don't have any problem with Redrow's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Redrow has 2 warning signs we think you should be aware of.
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If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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