Apple (AAPL) is one of those stocks that divides investors.
To some, Apple stock will never be a safe bet after its fall from grace in late 2012. Without Steve Jobs, the bears say, AAPL is doomed to fade away thanks to a lack of innovation.
To others, Apple stock is a sure thing. What could be better than a company with $150 billion in cash and investments, a rock-solid balance sheet, a dominant consumer brand and big outperformance year-to-date?
If I have to pick a side on Apple stock, I must admit I’m with the bulls — not the bears. AAPL stock is up over 20% year-to-date and has a nice tailwind … but beyond the sentiment, recent Apple sales and profit numbers are extremely encouraging to investors.
After a strong Apple earnings report, I have more confidence than ever that AAPL stock will rise. Here are the five big reasons why I like Apple stock right now:
Apple Margins: In the recent Apple earnings report, profits beat Wall Street forecasts. A big reason for that was widening in gross margins, up to 39.4% compared with guidance of about 38%. While that figure is only a bit above the 39.3% margins last quarter, any upward movement is a good thing. Ever since margins bottomed at 36.9% in the third quarter of 2013 — the ill-fated period when Apple decided to stuff the product line with two new iPhones and two new iPads — there has been a big focus on margins, and these recent Apple earnings showed that AAPL has the matter well in hand.
Apple Enterprise: As I’ve talked about before, iPad sales are a big risk to Apple stock in the long term — and those iPad sales were weak again in the latest Apple earnings report. However, I’m very encouraged by the deal with IBM (IBM) to help push enterprise tablet sales higher in the months ahead. And beyond the potential of tablets, AAPL earnings showed 18% more Mac computers sold last quarter compared with the same period in 2013. This is a powerful vote of confidence for Apple’s brand appeal as its Macbook stays the go-to choice for web designers, young professionals and other “serious” laptop users.
Apple Apps: While iPhones admittedly still make up half of Apple’s revenue, App Store software and iTunes content sales are rapidly becoming a big piece of the pie. In the latest Apple earnings report, revenue in this segment soared 12% year-over-year to almost $4.5 billion. That means software makes up 12% of total Apple revenue! Software and app sales are perhaps most interesting to me among all the other numbers in Apple earnings — particularly when you consider that the App store has margins of around 46%. People talk a lot about Amazon (AMZN) bleeding cash to build out a content business, but Apple is doing that while still making a mint on the hardware.
Apple Dividends and Buybacks: Apple returned $8 billion to shareholders via stock buybacks and dividends during the quarter. A dividend of 47 cents per share times 6.03 billion shares equals $2.8 billion in dividends, leaving a mammoth $5.2 billion in stock repurchases. Or put another way, Apple took 1% of its outstanding shares off the market last quarter! And you know what? With operating cash flow of $10.3 billion in the fiscal third quarter, Apple still had wiggle room to spare. There is simply no other company on the planet that can pull off a trick like that.
Apple Growth: The rallying cry of the Apple bears has long been the dearth of innovation at the tech giant. However, there are a host of new initiatives in the works that may provide a big impact on the bottom line … even if they don’t quite have the sex appeal some are looking for. There’s the aforementioned IBM partnership to help Apple with enterprise, the Beats headphone-and-music deal that will surely juice accessory sales, high hopes for the supersized iPhone 6 in September, then the long-rumored and highly anticipated iWatch, or, apparently, iTime. And who knows what another 12 months will bring?
I could go on with the same old tired arguments: Apple’s war chest as a springboard to success, the fact that the company’s 2% dividend is a mere 27% of future earnings and bound for big increases, a forward P/E of 13.5 (or actually 10 when you strip out the cash).
But the bottom line is that Apple is not simply a value play. This is a stock with a lot to offer after a strong earnings report.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.