- It has been proven that Apple was an excellent value play back in May of this year.
- The stock is up over $23 a share in 4 short months and initial quantities of the iPhone 7 have been sold out already.
- The stock market will rise until the elections at least, which will act as a tailwind. Improving fundamentals will charge Apple stock higher.
It is hard to believe that Apple Inc. (NSDQ:AAPL) was trading at $90 back in May of this year. I wrote back in May that I felt Apple stock price would go at least to $100 and now I feel $130 could be on the cards before the year is out. Back in May, when sentiment was at its lowest level all year, I wrote about looking at the big picture of this stock. Too many analysts were taking a short-term view. Apple had a bumper 2015, sporting $233 billion+ in top line and a whopping $53.4 billion in income.
Then the inevitable struck, and we witnessed massive outflows due to declines in iPhone sales. Many thought Apple's iPhone growth story was over but I wasn't having any of it. Fast forward a few months and now sentiment has spiked as initial quantities of the company's latest offering (the iPhone 7) have sold out. The stock has rallied strongly on the news and is now trading at almost $115 a share (Sep 16 closing price). This is only the start. Why? Because when you combine the fundamentals of Apple along with the fundamentals of the stock market, it looks like a match made in heaven.
Fundamental Ratios Illustrate How The Stock Is Still An Excellent Value Play
First of all, we should first discuss why Apple was such a good value play a few short months ago. Essentially, I go by 7 critical metrics which are in the table below. Furthermore, I study these financials over a 10-year time frame to get a sense of where the company is coming from. As we can see from the table below, even now with the stock trading well above $110 a share, Apple stock is still passing all of my metrics so more upside will come. Apple stock is a hold for me until it reaches at least an earnings multiple of 15. Based on 2016 earnings estimates which are at $8.26 per share, this would mean a share price of around $123. However, I believe the fourth quarter will deliver a surprise where the estimated $1.64 in earnings will be beaten. Consequently, the stock should get to $130 as a result.
|Metric||Value||What I Look for|
|Price To Book||4.8||(Meaningfully lower than 10 year average which is 5.5)|
|Price To Sales||2.8||(Meaningfully lower than 10 year average)|
|Price To Cash Flow||9.9||Under 10|
|Price To Earnings||13||Under 15|
|Debt To Equity||0.54||Under 1|
|Earnings Growth (10 Year Average)||45%||At Least 10%|
|Dividend Yield||2.04%||A 2%+ yield & strong growth rates (3 Year growth Rate Is 73%)|
Upgrade Program Is Proving To Be A Hit
Some analysts are stating that the iPhone 7 isn't advanced enough to get current iPhone users to upgrade in droves. This may be true when you compare it to 6s but iPhone 6 users may decide to upgrade as it has been 2 years now since that huge launch. A meaningful upgrade from the 6 model would drive sales for the iPhone7. Furthermore, Apple is making things easier for users who want to upgrade. Apart from the lenient conditions of the upgrade program where you can upgrade to a new iPhone every year (and pay it off over 24 months), the program has expanded into the UK and China. These features alone should alleviate some of the pain with relation to replacement cycles. Upgrading to a new phone every year will make sense for a lot of users especially if the payment can be spun out over a longer time frame.
Carriers Are Reporting Strong iPhone 7 Sales
Carriers are reporting upbeat sales on the iPhone 7 which is probably due to the extra storage and improved camera technology. One has to remember that this launch took place over 25 countries which was almost double the number compared to previous launches. Moreover, with 7 plus having a dual lens camera, some analysts now feel that more market share can be gained here due to the new camera getting very close to professional standards. This remains to be seen in future quarters
Momentum Is Clearly In The Picture Now
Apple stock, which is up almost 11.5% over the past 5 trading days definitely has had a head start over the broader market. Many traders and investors alike will be taking profits in the days ahead but I believe it will be a mistake. If we look at sentiment in the S&P500, we are still at bearish extremes. Furthermore, I'm convinced we have just printed a daily cycle low which means we should have rising prices - at least until we get to the elections. Now that Apple is slowly turning the screws on its financials and is still undervalued compared to the market, does one really think that Apple stock will slow down now?
To sum up, many investors missed Apple's stunning rally over the past 4 months. Its fundamentals were always sound despite iPhone growth coming under pressure in recent quarters. Furthermore, now that the stock has clear momentum along with tailwinds of a rising stock market, Apple stock is poised to rally strongly over the remainder of this year. The rally in Apple stock price is definitely not over yet.