- Apple stock has been climbing to a yearly high recently, with the company now worth close to $600B.
- Momentum from the new iPhone 7 release and weakness with key competitors should drive the company forward.
- Apple's upgrade model is kicking into high gear, and we expect greater things to come.
Apple Inc. (NASDAQ:AAPL) stock recently reached a YTD (year to day) high with a price that continued to hover around the $113 mark. Along with that, its market capitalization rose to approximately $600 billion. This is obviously great news for bullish investors who saw this stock at a two-year low just a few months ago. However, now that Apple stock is trading at new highs for the year, does that mean that it is too late to buy? This analyst says no. I believe that Apple stock is still a buy for both short and long term positions. This is because of three main fundamental factors. First off, mobile carriers are reporting that pre-sales for the new iPhone 7 are very strong. Second, Apple’s chief competitor Samsung has been having serious issues with their latest product, the Galaxy Note 7. Lastly and probably most importantly, many investors are underestimating the impact that the upcoming upgrade or replacement cycle will be having on sales. All three of these are important factors and deserve a more detailed look.
Also read: Will Apple Inc. Deliver Blowout Q4 Earnings?
Demand for the iPhone 7 is Heating Up
Breaking past traditions, Apple announced that it will not be revealing initial iPhone 7 order numbers. However, with that being said, both Sprint and T-Mobile reported that pre-orders have been about four times larger than last year. This is significant to look at because it shows the growth in popularity of the iPhone to customers outside of the more popular providers like AT&T or Verizon. Combine that with the fact that both Verizon and AT&T have reported pre-order volume in a normal range and you can see how this may be the largest iPhone launch in the company’s history. Simply put, more customers across all mobile providers are wanting what Apple is selling.
Samsung Just Gave Up $27 Billion in Market Share
This may be more of short term factor but it is still important to examine. Samsung recently announced that it would have to recall its popular Galaxy Note 7 due to battery issues. This could not have come at a better time for Apple as they announced the new iPhone. It is estimated that Samsung will lose about 10 percent of its sales due to this recall. I believe that this loss will translate into increased sales for Apple. Sales may only increase by a few percentage points but in the highly competitive smartphone market, that makes a huge difference.
The Importance of Upgrades
I think that the main catalyst to pay attention to with Apple is their upgrade/replacement cycle. Five years ago, only about 25 percent of sales came from customer upgrades. Today, that percentage has grown to 80%. This means that existing users keep wanting the upgrades and have continued to pay for them. The key aspect to look at when focusing on upgrades is what triggers a “needed upgrade”. Over recent years, the development of more powerful applications is driving these upgrades. Many new and innovative apps (especially in the virtual reality space) are requiring the newest and fastest hardware and software. This translates into customers having a larger incentive to upgrade and means greater overall sales both in the short and long term.
Apple Outlook and Stock Valuation:
Even after the stock moved up to 2016 highs this past week, it is still relatively cheap. Currently, it trades for less than 13 times next year’s earnings estimates. Compared to the rest of the S&P 500, this is at a discount. When you get down to the fundamentals, there may not be a more sound company today. It has a 38% gross margin, 37% return on investment, and had $50 billion in free cash flow over the past four quarters. With all of these great numbers, the company is still undervalued. Its P/E ratio is at 13.2 which is well under the industry average of 17. Combine this with a solid dividend yield as well, and Apple stock appeals to all kinds of investors.
Based on the information above, I am recommending a BUY on Apple stock with a 12-month price target of $130. The continued growth and sales of new products combined with a great income statement makes me bullish both long and short term on this stock. Apple is an overall solid company with plenty of room to continue to expand.
Also read: Our latest Apple stock coverage.