5 Reasons to Buy Apple Stock After Awesome Earnings

by Jeff Reeves | July 28, 2014 7:12 am

[1]Apple (AAPL[2]) 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[3]) 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[4]) 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[5] 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[6] is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks[7]. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com[8] or follow him on Twitter via @JeffReevesIP[9]. 

Source URL: https://investorplace.com/2014/07/buy-apple-stock-aapl-earnings/

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