The recent rotation out of tech stocks has triggered valuation debates about, among others, Apple Inc. (NASDAQ:AAPL) — particularly on the heels of the company’s World Wide Developer Conference, which invited many critics to proclaim “peak “ had arrived. AAPL stock, in fact, is about to finish June solidly in the red.
However, while the recent tech choppiness has at least eased, if there is a near-term tech bubble, it could be further exacerbated by the recent interest rate hike.
From my vantage point, AAPL stock is one of the better place to park some cash while the dust settles.
Reasons to Love AAPL Stock
Unlike the FANG stocks — Facebook Inc. (NASDAQ:FB), Amazon.com, Inc. (NASDAQ: AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — Apple also pays a respectable yield of 1.72%. And with the company’s cash balance near $260 billion, AAPL stock is still arguably among the cheapest on the market.
What’s more, the company just upped its capital return program by $50 billion, and still has room to raise that to $150 billion without causing an adverse impact on Apple’s needs to run the business.
Meanwhile, from a valuation perspective, AAPL stock — still down 8% from its 52-week high of $156.65 — is now priced at forward P/E of just 13.9 times fiscal 2017 earnings per share estimates of $8.94 when backing out its cash. Plus fiscal 2018 estimates of $10.57 per share, which implies 18% year-over-year EPS growth, puts the forward P/E at 14 and at about 10 when adjusting out its cash. This compares to a forward P/E of 19.9 for the S&P 500 index.
Assuming AAPL was priced at par with the rest of the market, the shares would trade today at around $200, making it the best tech bargain on the market. Apple management sees the discrepancy. That’s why after generating $52.3 billion in free cash flow last year, it’s further opened the tap on a capital distribution program.
Apple’s free cash flow, combined with its cheap valuation, has allowed it to buy back about $130.5 billion worth of shares over the last four years.
What’s more, with the Trump administration and the Republican-controlled Congress discussing rule changes to allow companies to repatriate overseas cash, Apple could soon have the flexibility it needs to spend on strategic acquisitions without taking a major tax hit. And that’s to say nothing about the savings Apple could realize if Trump’s call for lower corporate taxes is implemented.
This means an already-robust balance sheet could become even stronger.
Upcoming iPhone 8 Super-Cycle
Apple is on the verge of its super-cycle. The 10th-anniversary iPhone, expected to feature a new OLED display, could sell for more than $1,000 per device, according to some analysts. This explains why Wall Street didn’t punish AAPL stock for the miss on unit sales (50.8 million iPhones vs. expected 52 million) and the Q1 revenue shortfall.
“What matters from the March quarter conference call?” Morgan Stanley (NYSE:MS)analysts asked following the earnings release. “Frankly, not much, given current fundamentals reflect delayed demand ahead of new iPhones expected to launch in the month of September and ramp in volume during the December quarter.”
Bottom Line for AAPL Stock
Apple closed Thursday at $144.45. The shares, which fell nearly 4% between June 9 through June 15, rebounded about 3% last week. I believe these shares will continue to move higher as the company’s third quarter earnings report — due out the third week of July — approaches.
Wall Street expects Apple to deliver earnings of $1.57 per share on revenue of the $44.9 billion in the June quarter. This translates to year-over-year growth of 10.5% and 6%, respectively. Assuming a top- and bottom-line beat and solid guidance, AAPL should reach $160 by the end of July, delivering 9.5% returns in the next 30 days.
For investors looking for a long-term period, say 12 to 18 months, AAPL stock remains on track for $180, which is good enough for 25% returns from current levels.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
