Apple Inc (NASDAQ:AAPL) is approaching 1 trillion dollar market cap. These three factors could help Apple achieve this milestone.
Shares of Cupertino based tech giant Apple Inc (NASDAQ:AAPL) hit fresh all-time high after the iPhone maker reported a blow out quarter. Apple reported an EPS of $1.67, good for a 10 cent beat, and revenue of $45.4 billion, $510 million higher than the analyst consensus. The third quarter guidance was higher than what Wall Street was expecting. Apple guided for revenue of $49 billion to $52 billion against analysts estimate of $49.2 billion. Even its iPad segment which was witnessing a decline in sales over the last several quarters reported a growth. Naturally, the stock shot up after the earnings announcement. Apple stock is up 40% this year, taking its market cap to $832 billion. Apple Inc is on the way to hit the trillion dollar market cap soon. Here are three factors which could help Apple Inc achieve this milestone.
A Fortune 100 size segment which is growing fast.
Apple has a Fortune 100 company inside it, and that is growing fast. That's right, Apple's service segment, if taken alone, will be the 98th largest company in the world. In fact, services segment revenue of $27.8 billion in the last twelve months could take it past Facebook (NASDAQ:FB) which reported trailing twelve-quarter revenues of $27.6 billion. The services segment includes revenue from AppleMusic, AppleCare, Apple Pay, licensing and other services. And, according to Mr. Tim Cook, all the sub-segments inside services have been performing well.
Apart from the size, what is even more impressive is the speed at which this segment has grown in the last few years. Services revenues have grown at a CAGR of around 23% per year over the last five years. And this segment will continue to grow at a rapid pace for years to come. In fact, last May, Tim Cook had said that he expected the Services business to double by 2020, which would mean a CAGR of 18% till 2020. Apart from the growth, what is also important is the fact that this is one one of the most profitable segment of Apple Inc. According to an estimate by Piper Jaffray, the services segment has a gross margin of around 60%. The App Store, which was the main driver behind the strong performance of services segment has 80%-90% gross margin. In the first nine months of this year, Apple reported a gross margin of 38%. A fast growing, high margin business which already contributes a significant share of total revenues will definitely be a strong growth driver.
iPhone will continue to deliver.
Another factor which could drive AAPL stock higher is its iPhone segment. Despite all the talk of commoditization iPhone continues to deliver strong results. In the third quarter, Apple sold 41 million units of iPhone, slightly higher than Wall Street's estimate. Apple also managed to reduce channel inventory by over 3.3 million, implying that the demand for iPhones was, in fact, higher than sales numbers suggests. Many were expecting a drop in demand before the iPhone 8 release towards the end of September. Also, Apple is gearing up for the "iPhone SuperCycle". While there were reports of delay in the launch of the next iPhone due to supply constraints, the better than expected guidance suggests otherwise. Apple's iPhone sales could experience a "bulge" in the coming year, according to UBS analyst Steven Milunovich. Apple is also looking to drive iPhone sales in emerging markets by promoting older models which are generally less expensive and selling refurbished iPhones.
Capital return policy will continue to drive Apple stock higher.
It has been five years since Apple announced its first capital return policy in terms of share buybacks and dividends. In this period, the Cupertino based giant had returned more than $211 billion in capital to shareholders. This includes $151 billion in share buybacks and $54 billion in dividends. While the dividends continue to attract income investors, share buy back helps the company in delivering higher EPS.
Outstanding shares count is down by over 20% from the end of the third quarter of 2013, which has greatly boosted its EPS. The decline in average shares contributed a third of 17.8% EPS growth experienced by the company in the previous quarter. Apple is still committed to share buy backs which will keep driving its EPS and in turn its stock price higher. Apple stock is part of top stock picks which have outperformed the Nasdaq Composite by over 140%.
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