Should You Buy Apple Stock After Its August Stock Split?

Apple (NASDAQ:AAPL) stock popped in late July after the technology giant reported third-quarter numbers which breezed past estimates on the back of surprisingly strong iPhone demand amid the novel coronavirus pandemic.

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Also of note, Apple announced a 4-for-1 stock split for the end of August.

Bulls will note that stock splits are normally a good thing for stocks, especially for AAPL stock. Apple has split its stock four times in its history as a public company. Excluding the stock split that happened near the peak of the dot-com bubble in June 2000, AAPL stock has historically performed very well after stock splits, averaging a one-year return of 33% following the other three stock splits.

So, is history saying you should buy AAPL stock after the stock split?

Yes.

But don’t expect 30%-plus returns.

AAPL stock is fully valued today. A stock split plus favorable growth catalysts in 2021 will push shares higher over the next 12 months. But valuation friction will ultimately prevent those gains from hitting the 30%-plus mark.

Here’s a deeper look.

Strong Earnings From AAPL Stock

Apple’s third-quarter earnings report was surprisingly strong.

Remember, this was the quarter which included the months of April, May and June. In those months, the global economy was largely shut down. Consumers weren’t supposed to be buying iPhones, Macs, iPads and Apple Watches.

But they did.

iPhone revenues rose 2% in the quarter, powered by rebounding demand in May and June, as well as the new, low-price iPhone SE launch.

Meanwhile, Mac revenues rose 22% and iPad revenues rose 31%, on the back of work-from-home and stay-at-home tailwinds. Wearables revenue sustained huge growth in the quarter, rising 17% year-over-year.

Most importantly, the red-hot Services business stayed red-hot. Revenues rose 15% year-over-year, thanks to strong performance from the App Store and Apple’s various subscription services. Apple now has 550 million paid subscriptions across its platform, up from just 130 million a year ago.

Against that favorable demand backdrop, margins held up well, with gross margins clocking in at 38%, down just 40 basis points sequentially.

Overall, then, it was a solid quarter for Apple which broadly confirmed that the pandemic is not having a significant impact on the company’s core business trends.

A Stock Split Catalyst?

Investors cheered the announcement that Apple would split its stock in late August, thereby essentially turning this $400 stock into a $100 stock through the issuance of new shares.

Historically, stock splits have been a catalyst for AAPL stock outperformance.

When the stock split back in June 1987, AAPL stock rose 8% over the following 12 months. Following the February 2005 split, AAPL stock surged 53% higher over the subsequent 12 months. After the June 2014 split, the stock powered 38% higher over the following year.

Yes, there’s also the June 2000 split. Apple split its stock near the peak of the dot-com bubble. Over the next 12 months, the stock dropped 60%.

But, if you exclude that one anomaly, stock splits have historically powered 30%-plus gains in AAPL stock.

Could the same thing happen this time around?

Strong Tailwinds in 2021

Supporting the bull thesis that this stock split will help push AAPL stock higher is the reality that Apple will have powerful tailwinds in 2021.

Front and center, there’s the launch of the 5G iPhone, which should spark a super upgrade cycle like we’ve never seen before, especially if a Covid-19 vaccine is broadly administered to the general public in 2021 and unlocks significant pent-up consumer demand.

Potential consumer behavior normalization in 2021 should also propel strong growth throughout the entire hardware product portfolio, powering strong Mac, iPad and Wearables growth.

At the same time, the Services business should sustain robust growth, powered mostly by expansion of Apple’s newest subscription services, such as Apple TV+.

Solid revenue growth should bring margin expansion back into the picture, and reinvigorate profit growth.

All in all, then, Apple should have a solid 2021. That fact, coupled with the stock split, makes the bull thesis on AAPL stock over the next 12 months look quite compelling.

Good Upside Potential in Apple Stock

Word of caution: Don’t expect AAPL stock to rattle off a 30% gain in 2021.

But do expect the stock rise a solid 10% or so.

My numbers suggest that AAPL stock is fairly valued today. Powered by steady single-digit Products growth and steady double-digit Services growth, I see Apple scaling earnings per share toward $22 by 2025. Based on a 25 times forward earnings multiple, that implies a 2024 price target for AAPL stock of $550.

Discounted back by 8.5% per year, that implies a 2021 price target for AAPL stock of $430.

Add in the stock split catalyst, I could easily see Apple stock gaining 10%-plus over the next 12 months.

Bottom Line on AAPL Stock

Apple stock is a long-term winner. With some solid growth catalysts on the horizon. And a unique stock split catalyst coming soon.

To that end, buying AAPL stock here makes sense.

But don’t expect the stock split to power a huge rally in Apple stock. Valuation friction makes huge gains over the next 12 months look unlikely.

Instead, something in the range of 10% gains makes much more sense.

Still, that’s good return in a zero-rate world, especially when it’s coming from the world’s biggest and most stable company.