Ahead of the Apple (AAPL) earnings report, the Street certainly had a lot of concern. Would China be a problem? What about the traction with the iPhone 6 and new products like the Apple Watch and Apple Pay?
Well, yet again, the company proved there wasn’t much to worry about, as Apple posted the highest profit in corporate history. After reporting earnings, AAPL stock gained a solid 4%.
When it comes to AAPL, it’s usually not a good idea to bet against the company, right?
That’s usually true. However, people are once again questioning whether Apple can keep up its spectacular growth and profits. So, let’s take a look at the pros and cons of AAPL stock to see whether it’s worth investing in now.
AAPL Stock Pros
iPhone Magic: There are no signs of a slowdown in the growth of the iPhone. During the past year, AAPL sold a staggering 231 million devices. The company has a premium global brand, an extensive logistics platform, a thriving ecosystem of developers and other support systems such as retail and app stores. The company also controls both the device and software, which allows for a more seamless user experience.
China Factor: What slowdown? Granted, some U.S. companies, like Yum Brands (YUM), are having troubles as it appears the Chinese economy is slowing down. But there is still a tremendous amount of pent-up consumer demand, especially for aspirational brands, such as Starbucks (SBUX), Nike (NKE) and AAPL. In the latest quarter, Apple’s sales in China surged by 99% to $12.52 billion, with iPhone shipments up about 87%. And on the latest earnings call, CEO Tim Cook noted that the middle class is expected to increase by 10 within 5 years!
Financials and Valuation: The financials of AAPL are truly remarkable. In the latest quarter, the company posted $51 billion in revenues (up 22.3%) and $11.1 billion in net profits. And for all of fiscal 2015, revenues jumped 28% to $234 billion. With a huge amount of cash — about $206 billion — the company has been focused on shareholder value. So in the latest quarter, the company returned $17 billion in buybacks and dividends. What’s more, the valuation on AAPL stock is fairly reasonable, with the forward price-to-earnings ratio at 11. By comparison, Microsoft (MSFT) trades at 17x future earnings and Alphabet (GOOG, GOOGL) sports a forward multiple of 20.
AAPL Stock Cons
iPad Blues: There appears to be no end to the deterioration of the iPad segment. In the latest quarter, AAPL sold 9.8 units, down a grueling 20% on a year-over-year basis. Volume is down to levels not seen since 2011. Competition is rough. Microsoft (MSFT) is making nice strides with its Surface, and the company has a long-standing business with enterprises. Then there’s Amazon (AMZN), which is selling its own tablets at dirt-cheap prices. While the features may be nowhere near an iPad’s, they still may be enough for many buyers anyway.
Growth Issues: AAPL could ultimately be the victim of the “law of big numbers,” as the revenue base becomes too big to allow for a decent growth ramp. Consider this: If the company wants to grow by 10% for the next 12 months, it will need to find a hefty $23 billion in revenues! Some analysts are already sounding the alarm bells. For example, Sanford C. Bernstein’s Toni Sacconaghi recently noted: “The fear is that Apple is entering growth purgatory.”
Losing Focus: A key part of the success of AAPL has been devoting resources to a small number of products and making them stand out. More importantly, the products have been highly related and synergistic. But again, to keep up the growth rate, AAPL really has little choice but to go beyond its focus, such as by moving into categories like cars, the enterprise, healthcare and so on. True, these have potential for large amounts of revenues — but finding success could prove extremely difficult and distracting.
Bottom Line on AAPL Stock
When Cook came on board a few years ago, he had the seemingly impossible task of replacing the legendary Steve Jobs. Yet Cook has done a tremendous job. Let’s face it, he has kept the iPhone machine rolling.
Now the real challenge will be to find the next phases of growth. While there are lots of risk, it certainly helps that Cook has already shown he knows how to lead and move the organization forward at a brisk pace. So as he looks at new categories like the enterprise and cars, he should be given the benefit of the doubt.
Besides, AAPL stock is dirt-cheap, especially for a company that dominates the mobile industry and has an amazing brand. Does it really make sense for the shares to be trading at a steep discount to others like MSFT and Google? Of course not.
So, should you buy AAPL stock? Yes. In spite of the headwinds, I the pros outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
