Not long ago there was lots of worry about Apple Inc. (NASDAQ:AAPL). Could the company keep up its growth ramp? How will the new iPhone do?
Well, since the company reported its fiscal first-quarter results a few weeks ago, the concerns have mostly evaporated. Since then, AAPL stock has gained about 13% and the total market cap has grown to more than $700 billion, making it the most valuable company in history.
The financial results for the company were truly remarkable. Revenues jumped by 30% to $74.6 billion and earnings came to $18 billion, up 38%. They would have been even better if there was less volatility in the foreign exchange markets.
OK, so going forward, is AAPL stock still a good play here? Or should investors wait for a pullback? To see, let’s take a look at the pros and cons:
Pros on AAPL Stock
The iPhone franchise: In the latest quarter, AAPL blew away the Street’s expectations. The company sold more than 74 million units of its new iPhone 6 and iPhone 6 Plus models. To put things into perspective, there were 34,000 iPhones sold every hour throughout the quarter. While the iPhone provided a big lift to earnings, there was also a “halo” effect. In other words, the sales increased interest in other Apple products. In the quarter, there were more than 500 billion customer visits to the online stores. There was even a nice increase in Mac sales, up 14% to 5.5 million units. This happened even though the overall PC market has continued to limp along. But Apple is finding new ways to enhance the ecosystem. Perhaps one of the most important initiatives is Swift, which is a new language to develop apps. There have already been more than 11 million downloads.
New Markets: To keep up the growth, AAPL needs to target large segments. To this end, the company has launched a variety of programs, such as HealthKit, HomeKit and CarPlay. In fact, AAPL is also making a big push into the enterprise space. At the core of this is a partnership with International Business Machines Corp. (NYSE:IBM), which is helping to develop and distribute mobile apps for banking, retail, telecom, insurance and other major verticals. The goal is to launch more than 100 apps for 2015. But the one initiative could have the biggest impact is Apple Pay. The company has leveraged more than 750 banks and credit unions to make the system seamless for customers. But there are also a growing number of retail partners, such as Panera Bread Co (NASDAQ:PNRA) and Whole Foods Market, Inc. (NASDAQ:WFM).
Financials: The cash position is now at about $178 billion — certainly more than enough to fund any type of program or acquisition. The cash is also something that should help drive further buybacks and dividend increases. Consider that the yield is currently at 1.6%. The valuation on Apple stock is also reasonable, with the forward price-to-earnings ratio at 13X. This is roughly in-line with other mega tech operators, such as Microsoft Corporation (NASDAQ:MSFT) and Oracle Corporation (NASDAQ:ORCL). But of course, they are growing nowhere near the pace of AAPL.
Cons on AAPL Stock
But AAPL still needs to be concerned – that is, with the fast-charging Xiaomi. Founded about four years ago, the company is already the No. 1 seller of smartphones in China. The company thinks that its phones are on par with similar AAPL devices — but are half the price. Oh, and Xiaomi has ambitions beyond China. Keep in mind that the company is now making inroads in India.
iPad: The tablet is losing steam. In the latest quarter, iPad sales dropped by 22%.On the conference call, CEO Tim Cook noted that the upgrade cycle tends to be longer versus the iPhone. He also believes there is cannibalization. In other words, consumers may instead buy a Mac or a larger iPhone (Steve Jobs once said that it is better to canabilize your own products than to let your competitors do it!) While all this may be true, investors should still be concerned. After all, for AAPL to keep up its growth momentum, it needs to find mega market opportunities.
Expectations: Yes, Wall Street can get carried away when it comes to expectations. And this could easily be the case with AAPL stock, especially with the estimates for the Apple Watch. For example, JPMorgan Chase & Co.(NYSE:JPM) analyst Rod Hall forecasts first-year shipments at a hefty 26.3 million. Yet this may be too exuberant. For the most part, it will take time for consumers to understand the value proposition for a watch. There will also probably need to be changes in habits (hey, how many people even wear watches anymore?) In fact, there is some evidence that interest is fairly tepid. According to a recent poll from UBS AG (NYSE:UBS), about 10% of respondents were “very likely” to buy a watch.
Verdict on AAPL Stock
On the company earnings call, Cook said: “Apple’s mission is to make the greatest products on earth and enrich the lives of others.” So far, he has lived up to this vision.
If anything, it is actually tough to find anything fundamentally wrong about APPL. The company has a tremendous brand, top-notch products and a powerful global ecosystem. Such advantages are incredibly tough for rivals to attack. What’s more, with $178 billion in the bank, AAPL has the luxury to do just about anything it wants. But more importantly, the company is nicely positioned to benefit from the growth in mobile, which remains a hot market opportunity.
So should you buy AAPL stock? Given the attractive valuation and momentum of the core iPhone franchise, the investment still looks like a winner.
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.
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