- Near term results are not going to be affected by the tax bill from the European Commission. This case could take years to be resolved.
- Although iPhone sales have slowed meaningfully, Apple can still grow revenue in this area by increasing its market share.
- Software sales growth continues to be higher than hardware. Furthermore, Apple stock is much cheaper than the broader market.
It is all about the ecosystem with Apple Inc. (NASDAQ:AAPL) and investors who remain long this stock believe that current Apple customers will remain Apple customers long into the future. You can bet that this is the prime objective of Apple. Get its customers to have a fantastic user experience while at the same time entrench them more within its system and products.
Earnings across a number of metrics were impressive for the June quarter. Revenue came in at $42.4 billion which was down 15% on a rolling year basis, but it still came in ahead of expectations which was encouraging. Furthermore, gross margins fell by 140 basis points which was less than what I expected and illustrates to me that the company's iPhone SE isn't affecting margins as many bearish analysts originally thought.
iPad revenue really surprised on the upside, not just with the 7% jump in revenue but also concerning the higher price realizations due to customers opting for the more expensive models. Even when you include the company's post-earnings rally, Apple stock is now trading at an earnings multiple of 12.47 which is still below its 5 year average of 14.3. Technically and fundamentally, it looks to me that Apple stock is going to go a lot higher. Here are 5 strong reasons to back up my case.
Even If Apple Loses EU Tax Ruling, It Has Over $200 Billion In Overseas Cash Reserves
In terms of the tax ruling, investors need to take the $14.5 billion charge with a grain of salt? Why? Because if Apple were to actually lose this case (which will most probably be spanned out over many years), the amount is still only a pinprick compared to the $215 billion the company holds in cash internationally. Moreover, Apple's corporation tax is not in question here as the tax structure was amended in 2015. So basically profits in this market will not be affected after 2015. Being Irish, I can see how fellow European countries may feel aggrieved with Apple only paying 1% tax in 2004 which then eventually dropped to 0.005% by 2014.
Irish Government Will Be Dogged In protecting Its Tax Code
However, if Ireland's low corporation tax of 12% was going to be changed, it would have been done long ago. In fact, European leaders tried to squeeze the Irish government back in 2010 when we received a bailout to the tune of $85 billion but the corporation tax still held. To cut short a long story, the tax rate will remain and I can't see the European commission winning this ruling. With a population of over 4 million, US multinationals make up a large part of the present Irish workforce as foreign direct investment is crucial. Suffice to say that the Irish government will appeal this ruling and exercise their veto if they have to.
Huge Potential In Gaining Market Share Against Competitors
Analysts who are bearish on Apple are stating that a lot is riding on the latest iPhone launch but I still don't think Apple has to absolutely knock it out of the park with this particular launch. Why? Well, although Apple saw meaningful declines in its iPhone sales in fiscal Q3 of this year, fundamentals are still favorable in the smartphone market. I think Apple, compared to the competition, can benefit from this the most.
Firstly, Apple's iPhone only made up 16% of the total market in 2015 which was behind Samsung's 20%+. However, other manufacturers now make up almost 50% of smartphone shipments which highlights the potential for iPhone to gain more market share. Furthermore, the majority of smartphones on the market use Android's operating system which again highlights a potential for Apple to shift more users over to its iOS system.
The iPhone SE Will Bring In More Long Term Customers
The iPhone SE's objective is simple: A lower-priced iPhone to get more users to use Apple products. Furthermore, astute investors know the value of a long-term customer. Therefore, one shouldn't get sidetracked by the lower price of the SE model. In fact, I see initiatives like this continuing as it enables new users to try out Apple's ecosystem for far less dollars than usual. Developed markets may be slowing down regarding iPhone sales but Apple surprisingly makes up only 15 to 16% of global smartphone deliveries. Therefore, don't be disappointed if its new iPhone7 sales don't live up to the hype. Think long term.
Apple Will Rally With The S&P500
The US jobs data for August has rallied the stock market although the number was below expectations. Apple has always rallied with the market and because of its valuation, fundamentals and attractive technicals (see chart), going long Apple stock here would not be a bad idea. In my opinion, 'the powers that be' will not let equity markets fall before the elections. Combine this with the latest iPhone 7 launch (which will most likely rally the stock in the near term) and you are looking at a stock that could get back to its former highs quicker than many predict. Furthermore, the Nasdaq index continues to trade above its 2,000 highs again illustrating that this breakout could be for real and we are not going to get the correction many are expecting.
To sum up, when all the hype of the iPhone7 blows over, I still feel that we will be left with a stock that will march higher. Although services and apps income streams are growing faster than hardware, the iPhone growth story is far from over. It is all about Apple's ecosystem which is improving every year. Furthermore, expect lower priced products to continue. Apple is taking a long-term view. Maybe you should too.