- Mac's global market share has increased from 6.7% in the first quarter of 2015 to 7.4% in the first quarter of 2016.
- Improvement in the global economy will increase demand for personal computers.
- Mac's contribution to Apple Inc. growth could be quite significant.
Analysts and investors mainly look at the demand for iPhone when analyzing Apple's (NASDAQ:AAPL) growth prospects. This is quite evident since iPhone accounted for 68.1% of Apple's revenue in the last quarter. However, in my opinion, it is important to also follow the demand for Apple's Mac. While the PC market continues to deteriorate, Mac's market share is increasing. Although Mac revenue accounts for only about 9% of Apple's revenue, Mac's revenue of $25.3 billion in the last four quarters has been higher than the revenue of 405 large companies that are included in the S&P 500 index.
According to IDC's research report dated April 11, worldwide PC shipments totaled 60.6 million units in the first quarter of 2016, a year-over-year decline of 11.5%. Shipments were in line with conservative expectations for a decline of 11.3% and anticipated a relatively weak environment during the first half of 2016 as Windows 10 Enterprise upgrades mostly remained in pilot phase while consumer demand was weak. The volatility in stocks, commodities and currencies also helped depress shipments. However, Mac shipments fell only by 3.7% from the same quarter last year to 5,312 units, and Mac revenues have been pretty constant in the last six quarters, about $6.5 billion per quarter on average. Mac took the fourth spot worldwide and continued to outperform the market, thanks to substantial growth in North America. Mac's global market share has increased from 6.7% in the first quarter of 2015 to 7.4% in the first quarter of 2016. Moreover, Mac shipments in the U.S. have grown 5.6% year-over-year, and its market share has risen to 13.0% in Q1 2016 from 11.6% in the same quarter a year ago.
According to IDC, Inventory in the channel, which was a headwind through much of 2015, seems to be reducing. Similarly, some rebound in economic conditions should support both commercial and consumer activity going forward. As I see it, improvement in the global economy will increase demand for personal computers. Hence, Mac contribution to Apple Inc. growth could be quite significant.
All in all, despite some concern about decreasing demand for iPhone, I see high growth prospects for the company. New iPhone, due to be launched in September, could attract strong demand increasing revenues and earnings.
Since the beginning of the year, Apple stock price is up 4.4% while the S&P 500 Index has increased 1.8%, and the Nasdaq Composite Index has lost 1.4%. Since the beginning of 2012, Apple stock has gained 89.9%. In this period, the S&P 500 Index has increased 65.5%, and the Nasdaq Composite Index has risen 89.6%. According to TipRanks, the average target price of the top analysts is at $135.62, an upside of 23.5% from its April 15 close price, which appears reasonable, in my opinion.
Considering its compelling valuation metrics and high growth prospects, Apple stock, in my opinion, is undervalued. Apple's trailing P/E is low at 11.67, and its forward P/E is even lower at 10.97. The Enterprise Value/EBITDA ratio is very low at 7.80, and the price-to-free-cash-flow ratio is also very low at 11.90. Moreover, the PEG ratio is low at 1.00.
In addition, most of AAPL's return on capital and margins parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the tables below.
Apple has been paying a dividend since 2012; the forward annual dividend yield is at 1.89%, and the payout ratio is only 21.4%. The annual rate of dividend growth over the past three years was very high at 73.6%. Apple generated operating cash flow of $27.5 billion during the last quarter and returned over $9 billion to investors through share repurchases and dividends. The company has already completed $153 billion of its $200 billion capital return program.
According to Portfolio123’s "All-Stars: Buffett" ranking system AAPL's stock is ranked first among all 144 Russell 1000 tech stocks. The "All-Stars: Buffett " ranking system is based on investing principles of the well-known investor Warren Buffett.
The ranking system is quite complex, and it takes into account many factors like book value growth, operational P/E, price-to-book value, trailing P/E, price-to-tangible book value, price-to-cash flow and EPS stability, as shown in Portfolio123's chart below.
Back-testing over sixteen years has proved that this ranking system is very useful. The reader can find the back-tested results of this ranking system in this article.
Mac global market share has increased from 6.7% in the first quarter of 2015 to 7.4% in the first quarter of 2016. As I see it, improvement in the global economy will increase demand for personal computers. Hence, Mac contribution to Apple's growth could be quite significant. Considering its compelling valuation metrics and high growth prospects, Apple stock, in my opinion, is undervalued. Moreover, the company returns substantial capital to its shareholders through stock buyback and increasing dividend payments. The average target price of the top analysts is at $135.62, an upside of 23.5% from its April 15 close price, which appears reasonable, in my opinion.