- Expect a rally in Apple stock price up to September due to the iPhone 7 launch.
- My due diligence demonstrates that the company is a value play and most certainly not a value trap.
- Apple continues to coax customers from Android and Microsoft which illustrates that the fundamentals of its iPhone are still intact.
Apple (NASDAQ:AAPL) stock is a long way from its $112+ price it was trading at a few short months ago. The company's second quarter earnings in April of this year sent the stock falling as revenue fell for the first time in 13 years and iPhone sales fell for the first time ever. However "peak iPhone" may only be a temporary scenario as although sales will undoubtedly slow in the near term, you just know that the company is working tirelessly behind the scenes trying to bring far more value to the market through its iPhone and this "value" may happen sooner than many realize.
Apart from slowing sales, another headwind hanging over the stock is the decision by Beijing's intellectual property regulator to stop iPhone 6 and 6 plus sales in the city but I see this as a storm in a teacup which will blow over in due time. In fact, Apple has done excellently in China so far and I can only see this growth continuing as an emerging middle class keeps smartphone demand elevated.
iPhone Launches Have Always Been Preceded By A Rally In The Stock Price
Firstly with the iPhone 7 due to be launched in September, investors will be well aware that Apple stock price has always outperformed the S&P500 in the weeks leading up to the launch. If we take a 10 week window, we are right there now, so Apple's share price should start pushing higher from here on. Furthermore, the company has the advantage of a rising stock market despite the most recent Brexit vote which resulted in the market losing 100 handles before we witnessed another V shaped recovery (see chart). The Brexit vote in my opinion caused the market to print an intermediate bottom on the 27th of June. Intermediate cycles can last up to 25 weeks and Apple stock should continue to rise alongside the market especially with its upcoming launch to come.
Apple Has High Income, Low Debt And Billions Of Cash Making It A Sound Value Play
Valuation is another positive Apple has going for it especially considering that a special dividend could be on the cards in the near term. At the moment, Apple is paying out a 2.38% dividend yield but with a paltry payout ratio of 23% and with $55 billion of cash and short term investments on its balance sheet, some investors are expecting the company to announce the pay-out of a special dividend which would really attract value investors in hoards. Apple has all the signs of being a quality value play. Its debt to equity ratio of 0.53 is attractive plus its earnings and sales multiples of 10.6 and 2.4 are well below historic averages.
Furthermore, the market is punishing the stock because its earnings will be lower than 2015 this year and next but Apple is still predicted to bring in $8.24 in EPS this year and a further $9.02 the following year. Therefore, we should have positive earnings growth on a yearly basis once 2016 finishes in September which again will attract investors in hoards.
Android At Present Is Losing Customers To Apple
Apple is confident that customers will continue to switch in droves from Android, Google's mobile operating system. In fact, this year alone Apple witnessed more switchers from the likes of Android and Microsoft in its entire history. Furthermore, emerging markets like India continue to be high growth markets for Apple with the company reporting 56% rolling year growth in its most recent quarter. These are some of the trends Apple bears are missing. Yes unit sales dropped by 16% in the last quarter but its long term fundamentals seem to be intact. We will know more in the Autumn but its iPhone SE model should gain traction in the Indian market, for example.
To sum up, Apple is more and more turning into a shareholder friendly company which attracted the likes of Warren Buffet to invest in the company. Strong buybacks will continue to help the company's earnings in this transitioning period no doubt. Given the combination of the impending iPhone7 launch, a rising stock market and further growth in emerging markets, it would be foolish to believe that the company's iPhone growth story is over. This stock is still too cheap to ignore and wont be under $100 for long.