Why Apple, Inc. IPhone Growth Will Pick Up Again?

  • Apple's iPhone sales are still falling, but at a much slower pace. We could see this reverse once the iPhone 7 is released.
  • iPhone sales will inevitably rebound thanks to very strong demand.
  • The Apple Inc. stock is priced at a gigantic discount to intrinsic value thanks to overly pessimistic analysts' expectations.

There's no doubt that the Apple Inc. (NSDQ:AAPL) iPhone's growth rate has been heading down. There are fears that the iPhone is falling out of favor for good and that we've seen "peak Apple". iPhones account for approximately 65% of Apple's revenues and investors have become overly pessimistic as iPhone sales declined to 40.4 million units in Q3 2016. I do not believe we've seen "peak Apple" or anything close to it. Especially since Apple still has a huge demand imbalance, as seen in the recent release of its iPhone SE which is expected to be a hit in emerging markets such as India.

There are many tailwinds that could re-accelerate iPhone sales in the medium term. Demand for the iPhone is still very strong and as Apple moves into emerging markets, we may see iPhone sales growth spike very sharply as the iPhone 7 releases.

There are a lot of customers switching from the Android OS to Apple's iOS lately, and Apple noted that these switchers will provide a huge tailwind for the upcoming iPhone 7 release, which is expected to have very strong demand.

Apple is taking a huge initiative to move into emerging markets. iPhone sales in India have grown by an astonishing 56% year-over-year, and Apple sees the iPhone SE becoming a huge hit in developing nations, as it is a cheaper alternative that caters to first time buyers. Apple's guidance shows that iPhone sales will be in the 43.5 to 45 million unit range for this year and all evidence suggests that this is a very reasonable target.

iPhone sales are declining, but the downward momentum is decreasing and I believe sales will pick up as we head into the latter part of 2016, with the release of the iPhone 7 later this year. Analysts are very pessimistic right now and I believe this presents an opportunity for the individual investor to get into this great stock at a huge discount to intrinsic value.

With everyone expecting the worst, if something better than expected happens, we could see Apple stock soar to incredible new highs. Investors are worried that the growth is no longer there for Apple and that the iPhone is on its way out. But iPhone demand is still high and we could see sales turnaround very quickly thanks to the tailwinds I mentioned. When looking at the big picture, we see Apple with a long-term annual revenue growth of 21.1% over the last five years with an impressive return on invested capital (ROIC) of 25.7%. The return on equity (ROE) is also very impressive at 38%, which implies Apple's investment initiatives, like plans to grow in emerging markets will deliver huge value to shareholders in the long run.

Apple is currently undervalued on almost every metric. The P/E, P/B, and P/CF are all lower than their five-year historical average values. To assume the iPhone is on its way out is a mistake. Pick up shares of Apple, as shares could rebound to new highs following the release of the iPhone 7, which I believe may be a turnaround point for the iPhone, as well as Apple stock.

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