As a product and a brand, Apple Inc. (NASDAQ:AAPL) seems invincible. It is doing everything right, at least at the moment. And as a result, Apple stock holders are finally seeing the go-go returns they had missed for some time.
With its iPhone 7 release, the company is capitalizing on Samsung’s (OTCMKTS:SSNLF) massive Galaxy S7 Edge recall. Apple Music continues to grow subscribers. The company just refreshed its iconic iPad, by not only cutting its price but refreshing the hardware slightly.
Even legendary investor Warren Buffett increased his Berkshire Hathaway Inc. (NYSE:BRK.B) portfolio weighting in the company’s shares. At a price-to-earnings ratio well below 18 and a forward P/E of just 14, is Apple cheap enough to keep moving higher?
Yes … even though Apple isn’t even clicking on all cylinders.
iPad Sales Are on the Decline
Tablet sales are dropping at a rapid clip, and Apple’s iPad business is not immune. The declining popularity is not a big concern because the bigger iPhone 7 Plus alleviates any need for a tablet. The iPad Pro also fills a gap between smartphones and laptops.
Apple is treating the tablet market as a mature business line. After 12 consecutive quarters of falling sales, the iPad refresh at a lower price might be able to change that trend. The thing is, while the actual iPad has become cheaper, the iPad Mini 2 has dropped — meaning the cheapest tablet you can buy is now $60 more expensive.
Strong Demand for iPhone 7
On the flip side, Apple is riding strong iPhone 7 demand. In the most recent quarter, iPhone 7 Plus sales grew as a proportion of total sales. Demand was so strong that it exceed supply throughout the quarter. Apple finally balanced supply and demand levels in January.
In the quarter, the company sold 78.3 million units — an all-time high for the company, and a 5% increase year-over-year.
Now, with the launch of the RED iPhone 7, Apple might be able to keep up interest ahead of its new iPhone out later this year.
MacBook Refresh Is Uninspiring
After many years of little change, Apple finally refreshed the Macbook Pro. The “Touch Bar” is the biggest change on the laptop. Unfortunately, Apple removed MagSafe, which many tech sites (like Quartz and The Verge) and consumers dub is the smartest invention ever.
Investors need not concern themselves on changes to the MacBook failing to spur sales. iPhone sales still make up the bulk of revenue and growth, while the Services division is elevating the company’s profitability.
Whispers and rumors have been going at a mile a minute surrounding an iPhone 8, marking the 10th anniversary for the successful device.
One may criticize the fact that iPhone 7’s only major enhancement is the improved camera. After all, the haptic home button adds no changes in its previous functionality.
Expect nothing so lean from the iPhone 8.
The iPhone 8 may support augmented reality, virtual reality, and/or 3D sensing. Some Android phones have so much computing and graphics processing power that they already supports these features. But that’s OK. Apple has never rushed to develop new technologies — instead, it typically perfects what’s already out there.
Besides, there are few AR and VR apps or games that make having this tech a must-have at this time. But that will change in the next couple of years, so Apple’s timing is just fine.
Bottom Line on Apple Stock
Apple is in fine shape, thus AAPL is in fine shape.
Warren Buffett, legendary for his value stock picks, is holding more Apple stock than ever. The positive outlook does not even include the automotive industry adapting CarPlay, or the fact that Apple Music is highly profitable and growing.
Last but not least, never discount the giant cash hoard backing Apple stock. Not only does AAPL have nearly $250 billion in cash and investments (versus $77 billion in very low-interest debt) that the company can use to finance game-changing M&A, or special dividends, or buybacks, what have you. But that cash also distorts the valuation — and in fact makes the argument that AAPL should carry a much higher P/E given just how much in raw cash it holds.
Apple stock is a buy, even if gains don’t come in a straight line from here.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.