- Revenue projections look bullish for Q1-2017. If demand can meet supply for the holiday season, positive Phone sales growth rates will resume.
- Service revenue is still growing meaningfully which is more predictable revenue and ties customers even more into Apple's ecosystem.
- The projected margin dip next quarter will only be temporary due to not selling enough iPhone 7's.
Apple Inc. (NSDQ:AAPL) hasn't been having its own way recently. A few months ago, the company was ordered to return $13 billion in back taxes in Europe plus now it has to deal with a new US president in Donald Trump who clearly has reservations on how Apple runs its business affairs. Recently though, the Irish government announced that it would be appealing the European Commission's decision to seek back taxes from the tech giant. However, with Trump now the president-elect, the Nasdaq index in general was performing very well until it sold off by over 150 points on Thursday the 10th of November and recovered marginally by 30 points on Friday, November 11th. Apple (and other tech stocks) got caught up in the downswing only to recover slightly which has left us now with Apple trading at just over $108.43 a share. Here's Why Apple stock is cheap at sub $110.
This has to be disappointing for Apple longs considering the progress the stock had made (going from around $90 a share back in May to reach over $118 a share just a few weeks ago). However, once markets calm down, I still like Apple's fundamentals and firmly believe the share price will be going higher. Why? Well, although the top line fell 9% to $46.9 billion in its most recent fiscal Q4, service revenue rose 24% to almost reach $6.3 billion which is encouraging. Apple's service segment now is the second highest earning segment behind the iPhone segment. I backed Apple stock a few months ago to return to its former highs of $130+ per share and I still believe it will get there.
Analyse Apple Over 5 Years and Not 2 Years
Most analysts attempt to put a value on Apple stock from its iPhone sales which fell again by 13% to print $28.2 billion in the final quarter of 2016. Now that the fiscal year is finished, we can see that the company brought in $45.7 billion in total net income in 2016 compared to $53.39 billion in 2015. Furthermore, revenues dropped in 2016 to $215 billion from an impressive $233 billion in the previous year. However, investors need to look at this stock over a longer time frame than 12 months and instead look at Apple's fundamentals over a 5 year or 10 year window. The stock has basically doubled over the past 5 years and many important fundamental metrics look very attractive today compared to 2011.
|Price To Earnings||13.1||14.6|
|Price To Sales||2.7||3.5|
|Price To Cash Flow||9||10.1|
|Debt To Equity||0.59||0|
We Will See Revenue Growth In Q1-2017
As the numbers show, the company is much cheaper now on a valuation basis than in 2011. In fact, it is only worse off now on a debt and gross margin standing. Remember the stock is where it is because the market is pricing in negative iPhone growth indefinitely. This is why sales of the holiday season or fiscal Q1-2017 now become crucial. Why? Because the company is projecting sales of $76 to $78 billion, which if achieved would be around a 2.6% increase over the same quarter of 12 months prior. Bears will point to the lower projected gross margins of 38 to 38.5%, but the drop in margins will be temporary in my opinion as Apple may not be able to meet full demand for the iPhone 7 during the holiday season. Whatever the theme, what I want to see it realize is iPhone sales growth (units), which is the real reason why the market has pinned this stock down since last summer.
Service Segment Will Continue To Grow Meaningfully
Therefore, I would encourage investors to watch iPhone unit sales and also the growth rate of its Service segment. This segment includes iTunes and Apple Pay to name a few. The growth of this segment is crucial in the sense that it strengthens the bond between customers and the Apple ecosystem. Apple Music drove growth last quarter with a top line increase of 22% and Apple Pay is growing rapidly as the service gets rolled out all over the world. Apple Pay definitely achieved first mover advantage back in 2014 when mobile payments technology started to hit the market. Combining this with excellent industry fundamentals, it is no wonder why analysts are projecting at least 600% top line growth between now and 2020.
Guidance for the next quarter looks very strong in the sense that the company has projected almost 3% revenue growth. Margins will be slightly down mainly due to Apple not being able to ship as many iPhone 7's as it would like but this should only be a temporary issue. Watch the service segment and its margins. Apple is really bullish on this area and with good reason. The faster this segment grows, the more stable Apple's revenues and margins will become which should please the market in due course.
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