- Apple Inc. accounted for over 90% of global smartphone profits in Q3 2016.
- There are multiple reports of Apple releasing an OLED iPhone model in 2018.
- With reports of 100M orders for OLED displays, Is Apple setting up for a massive FY 2018?
Apple (NASDAQ:AAPL) could be setting up for a strong finish to calendar year 2016. Apple stock has reversed all the losses which had been incurred in the trading sessions following the Trump victory. With the stock gaining over 6% from its recent lows, is this a 'dead cat' bounce or the beginning of a long-term rally? Should you sell on the bounce or buy on the dip? These are questions which could crop up in the minds of investors.
Apple Stock Is Trading At Throwaway Valuations
Apple stock is currently trading at a trailing twelve month (TTM) PE ratio of 13.4 (based on Nov 23 close price) and PS ratio of 2.77, both of which are at a discount to the long-term (5 year) average multiples the stock has enjoyed. The stock is also trading at a discount to its industry, as pointed out by fellow contributor Stavros in his recent Apple post. What makes the Apple bullish thesis stronger are the high return ratios (ROE of 36%) which the company continues to deliver, which come along with the industry-leading profit margins. (See also: Trump Fears Didn't Drag Apple Inc Stock, This Did)
Talking about profitability, a recent report by strategy analytics puts things into perspective. The analytics powerhouse stated that Apple cornered 91% of global smartphone profits in Q3 2016. Quoting from the report:
We estimate the global smartphone industry realized total operating profits of US$9.4 billion during Q3 2016. Apple dominated and captured a record 91 percent share of all smartphone profits worldwide. Apple’s ability to maximize pricing and minimize production cost is hugely impressive and the iPhone continues to generate monster profits. Huawei, Vivo and OPPO are the next three most profitable smartphone vendors globally this quarter, but they are still a long way behind Apple.
With Samsung out of the race in the premium segment until their next major product launch (in April 2017), Apple should be able to leverage the vacuum created by Samsung's loss and will take home majority of the profits in this space for at least the next 2 quarters. Apple is leaving no stone unturned to make the most of this opportunity, with the company announcing a one day sale on Black friday.
Apple Is Setting Up For A Strong 2018
Various reports from multiple sources, including Barclays, Nikkei and KGI's Ming Chi Kuo have provided conflicting inputs with respect to the iPhone launch in 2017. While the reputed KGI securities analyst and Nikkei expect Apple to launch 3 models in 2017, Barclays expects the company to launch just 2 models. However, they all seem to agree on one thing: OLED screens on one of the iPhone models in 2017. We could have a strong year in 2018, which will see analysts updating their growth forecasts as greater details emerge. The result will be re-rating of the stock driven by multiple expansion as well as stronger than expected EPS growth.
As reported by Bloomberg, Apple Inc. has placed an initial order for 100M OLED screens with Samsung, which are to be delivered in 2017. These screens are to be shipped through Apple's FY 2017 (October 2017-September 2018). As per the Bloomberg report:
Apple’s initial OLED order from Samsung is for 100 million units over one year, according to people familiar with the agreement. Even so, Samsung will probably only be able to deliver a portion of that for the 2017 holiday period. Apple shipped about 75 million iPhones in the 2015 holiday quarter, and some analysts estimate that as many as 90 million could be sold in the last three months of 2017.
To put things in perspective, Apple shipped 211M iPhones in the just-concluded FY 2016. Wall Street expectations for the December quarter iPhone shipments range from 74M (UBS) to 78M (Canaccord Genuity), with a midpoint of 76M. With some analysts expecting Apple to ship 90M units in the first quarter of FY 2018, Apple could well be headed for massive iPhone-driven growth in 2018. (See also: Is Apple Inc. Stock Still A Great Buy?)
Apple is also expected to make radical form factor changes (Flexible larger OLED screen) and feature additions (speculated wireless charging) to iPhone models in 2018. Form factor changes in the past (iPhone 6 cycle) generated tremendous market share gains and strong growth (record year in FY 2015). Also, with Apple offering the same form factor on three generations of the iPhone (6, 6S and 7), pent up demand from iPhone users looking for a radical change before their next upgrade will also be higher than earlier cycles. A repeat of market share gains and strong growth looks highly probable based on past customer response to radical changes in the iPhone.
Apple Stock Technicals Indicate An Uptrend
AAPL stock has bounced off its 200 day moving average after having moved lower through the last week. With the stock now approaching its 50 day moving average (112.82), any breakout above the 50 day moving average on strong volumes will be a strong buy signal. Given the strength in the NASDAQ composite and NASDAQ 100 indexes (both up 2%+ in last 5 trading sessions), a breakout above the 50 day moving average looks highly probable over the next few trading sessions. Apple stock looks perfectly set for a Santa Claus rally.
To sum up, we could have a strong year in 2018, which will see analysts updating their growth forecasts as greater details emerge. Given the current low valuations of Apple stock, the underside risk appears to be minor. AAPL stock looks set for a strong long-term rally driven by multiple expansion as well as EPS surprises. Hence, long-term investors should buy into AAPL stock at the depressed current valuations.
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