Is Apple Inc. (AAPL) Stock Still Cheap?

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I was looking over the results of the latest Apple Inc. (NASDAQ:AAPL) earnings report, and the numbers were pretty darn amazing. I am moving toward a conclusion that AAPL stock is increasingly attractive despite the fact Apple appears to no longer be a computer company, but more of an enhanced tech lifestyle company.

Is Apple Inc. (AAPL) Stock Still Cheap?

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First, though, we have to put the numbers into context.

Apple’s Fiscal Q3 Results

Apple earned $1.67 per share in its fiscal third quarter, up 18% from last year’s $1.42 in profits and better than expectations of $1.57. However, on a straight-up net income basis, earnings rose 13% to $8.72 billion. In other words, that per-share number benefited (as always) from a lot of repurchases of AAPL stock; share count was reduced by almost 5%.

This came on a 7.5% revenue increase to $45.4 billion. Analysts were expecting a top line of $44.9 billion.

Apple moved more than 41 million iPhones, and this might be the most important number of all.

The narrative heading into third-quarter earnings was that consumers were waiting for the iPhone 8 before purchasing a new smartphone. It’s what Tim Cook blamed weak fiscal Q2 results on, after all. But these fears appear to be more myth than fact.

By the way, inventory fell by over 3 million units. What retailers wouldn’t love to see an inventory decrease on top of an increase in sales? This also translates to iPhone representing about 55% of revenue, down from 70% or more, so that comes as a relief.

The good news is that sales aren’t flagging. That means iPhones provide the backbone of the business, generating tons of free cash flow, and providing a kind of razor for the razor-and-blade analogy of the early Gillette model. I prefer to think of it more as a Trojan Horse. Sell a nifty, pricey, essential product and build other revenue sources around it.

Still, though, there hasn’t been growth in iPhone sales. More on that in a second.

Other Pleasant Surprises

Apple surprised everyone on another level: iPad sales. The product had not seen YOY increases in this product for quite some time, but in Q3, iPad sales leaped about 25% to 11.4 million units sold.

Apple Services is what really surprised me the most. I think it is now safe to say that Apple is on to something here.

Revenue is now more than $7.25 billion for a quarter, up about 21% YOY. What was once a questionable niche market for Apple stock is now fully one-sixth of company revenue.

Tim Cook wanted to double Services revenue by 2020. I think that just might happen.

This takes us to the importance of this division. With iPhone sales robust but stagnant in growth, the fact that Services is growing tells us this is the area to focus on for ongoing growth.

The other thing of interest is that the Apple Watch, which I thought was dead in the water, is actually doing very well. Sales were up by 50%, and not only that, no other company — not Fitbit Inc (NYSE:FIT), not Garmin Ltd. (NASDAQ:GRMN) — comes close to impacting this market. With talk that the Apple Watch may soon have Wi-Fi, and some other forms of connectivity, there may be room to grow here as well.

When we add the news that Apple gave revenue estimates of $49 billion-$52 billion, which was an increase in guidance, I realize now that Apple may have more growth ahead of it that I thought.

Bottom Line on AAPL Stock

Apple currently has $260 billion in cash and investments. If we back out 15% of this amount, should AAPL get a tax repatriation holiday, and subtract debt, the company has $130 billion in net cash, or $25 or so per share in cash.

At a net cash and tax market cap of $700 billion, AAPL stock trades at only 15 times its trailing 12-month earnings.

Folks, that is still a fair price for most companies … but especially one that has a built-in momentum generator like the iPhone 8 coming out later this year.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


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