Apple Inc. (AAPL) is one of the most iconic American companies. The Apple iPhone continues to be a smash hit with consumers. AAPL stock recently eclipsed $700 billion in market capitalization. And accounting for a 7-for-1 split, Apple stock is up about 60% in the last year vs. 15% or so for the S&P 500 in the same period.
But what AAPL investors really want to know after all this success is whether Apple stock can keep this up.
Given the bullish headlines for the tech giant at the end of 2014, it’s a very good bet that it will. Apple is seeing strong demand for both old and new products, and its balance sheet is one of the most enviable on Wall Street.
Here are the specifics on why AAPL stock is a buy for 2015 even after the big run for Apple lately:
The Amazing iPhone: Haters like to say AAPL stock is a one-trick pony, with the iPhone accounting for over half its revenue. But hey … it’s a pretty darn good trick. In the latest quarter, Apple sold 39.27 million units vs. a target of 38 million thanks to a new line of larger devices. While a decline in iPad sales isn’t grand, with just 12.3 million tablets sold vs. a target of 13 million on the quarter and a total of 14.1 million units last year. However, it’s natural for larger phones — particularly the Apple iPhone 6 Plus, with a screen that has a 5.5-inch display — to cannibalize tablet sales. And considering the margins and dominance of the iPhone, that’s something AAPL stock investors should be OK with in 2015. Besides, top competitor Samsung (SSNLF) is also grappling with soft phablet and tablet sales, so it’s hardly like anyone is a risk to knock Apple from its perch atop the hardware world.
Strong Earnings: Apple’s all-important fiscal fourth quarter ended in September, and the numbers were simply amazing. Thanks to the strong debut of new iPhones, revenue was up 13% to $42.12 billion vs. a target of $39.85 billion and profits were up 20% to $1.42 per share vs. a target of $1.31. To top it off, Apple also moved its forecasts for Q1 higher after those results! Strong growth on both the top and bottom lines, as well as beating expectations by a wide margin, are the hallmarks of a great company with bright prospects.
Apple Dividends: While Apple’s yield has fallen to a mere 1.6% thanks to the sharp rise in its stock, it’s important to remember that the dividend only got up and running back in 2012. And since then, payouts have increased by nearly 25%. Furthermore, those distributions are just 22% of projected fiscal 2015 earnings, so there’s plenty of wiggle room for dividend increases in 2015 and beyond.
AAPL Stock Buybacks: According its 10-K, the company repurchased roughly $45 billion in AAPL stock across fiscal 2014. As a result of aggressive Apple stock buybacks across the last few years, diluted shares have dropped from 6.617 billion in FY2012 to just 6.122 billion as of the end of FY2014 — about 7.5% of all stock! That kind of stock repurchasing not only props up earnings but ensures a smaller supply and strong demand for Apple stock, in 2015 and beyond.
iWatch Impact: If you believe Apple’s own hype for the smartwatch, the device will be “huge” in 2015. The iWatch was recently delayed, but only until spring 2015, which is the perfect time in the Apple product cycle for a new launch to hit with maximum impact. Besides, investors should know by now that many of the challenges Apple has endured on production and distribution in recent years has been driven by rabid demand — a good problem to have, and one that the iWatch seems to share. Supply issues can easily be fixed in time, and strong initial demand for a highly anticipated product like the iWatch bodes well for AAPL stock in 2015.
App Annuities: Perhaps most interesting to me is the fact that Apple continues to see its iTunes and App Store sales soar. Last year, about 10% of total sales — over $18 billion — came from software and services. That’s up 50% from two years ago and proof positive that the more iPhones that get sold, the more sales Apple enjoys over time in the App Store. While there is validity to the concerns that Apple can only sell so many iPhones and is becoming a victim of its own scale on this front, it’s important to understand that a big driver of AAPL stock going forward will be add-on sales of media, games and other software as much as the upgrade cycle for hardware.
Payment Power: Mobile payments potential via Apple Pay could start to be a real driver of revenue for AAPL in 2015. Accenture calculates about $13 trillion in total global payments each year, with digital sales rapidly growing as a share of that. Apple has wisely avoided any true banking or financial operations here and is simply acting as a middleman on payments, and that keeps risks low while at the same time allowing for user adoption. This is uncharted territory, but has a lot of upside potential. There is competition, of course, like eBay Inc. (EBAY) division PayPal which will soon be spun off on its own. But the power Apple has as a gatekeeper of the most dominant smartphone gives it a big leg up when it comes to mobile payments. Expect big things from AAPL stock on this front in 2015.
Cash King: Apple’s free cash flow was $59.7 billion last fiscal year on revenue of $182.8 billion. If that’s not enough money sloshing around for you, there’s also over $155 billion in cash and investments on the books. True, the lion’s share of that cash is overseas … but the recent Republican gains in the Senate increase the likelihood of legislation that would allow for repatriation of that cash in 2015.
Momentum: Don’t count out the power of sentiment with an iconic company like Apple. The fact that shares are at a new all-time high and that investors have outperformed lately is helpful to momentum for AAPL stock in the New Year. Furthermore, keep in mind that since Tim Cook took over as CEO in August 2011, the stock is up more than 130% — significantly better than the 75% or so for the S&P 500. There’s reason to have faith Apple stock will rise in the future, too.
The Next Big Thing: Apple isn’t like rival Google Inc. (GOOG) in that it throws money around willy-nilly on small-time acquisitions. However, the substantial purchase of Beats for $3.2 billion shows Apple isn’t afraid to make a bid for other companies. Furthermore, even if an acquisition doesn’t happen, there’s a lot of innovation still going on at Apple. The 2014 annual report for AAPL stock reports that research spending was $6 billion in the last fiscal year, up from $4.5 billion in 2013.
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 email@example.com or follow him on Twitter via @JeffReevesIP.