- The iPhone may no longer be a high growth area but I can't see demand tapering off as much as Apple's current stock price suggests.
- Apple's fundamentals are still excellent despite reporting, in its March quarter, its first quarterly top line decline since 2003.
- I believe the Nasdaq will break out to new highs (past 5,210) in 2016. Apple stock will not remain stagnant in a rising tech sector.
Sentiment on Apple Inc. (NASDAQ:AAPL) stock is now at around the 60 level which is low for this stock as analysts and investors alike usually take a bullish stance on this stock. In fact, Apple's recent March quarter changed sentiment (see chart) as revenues came in 13% lower than estimates at $50.6 billion with the iPhone being the main culprit ( Unit sales dropped 16% to register 51.2 million products sold).
Source : Sentimentrader.com
Guidance came in well below expectations, which also prompted many investors to sell the stock as they believe the iPhone growth story is over. I'm not so sure. We could easily get a rebound in sales this fall with the iPhone 7 and I also feel that bears forget the high customer switching costs that Apple has baked into its products. This will only increase in years to come as the innovation of the iOS ecosystem will entrench even more customers which will have to increase repeat sales. Furthermore, Apple bears harp on about less Android switches and less carriers than before but remember all it would take would be another innovative leap to change this trend. Furthermore, innovation may not take place in the smartphone market but in other services such as iCloud and Apple Pay but I see these services entrenching customers even more which has to lead to more iPhone sales. Here are more bullish factors.
If we take a look at analysts estimates, we can see that EPS projections for this year are around $8.27 which will be followed by $9.15 in FY 2017. Revenues are predicted to come in at around $215 billion this year which will be followed by $226.7 billion in its fiscal year ending September 2017. These top line numbers are still below what the company did in 2015 ($233 billion) but what investors need to take into account is that Apple's top line took an enormous leap in 2015 as top line sales only came in at $182 billion the previous year. In fact, Apple increased its top line more in 2015 (on a rolling year basis) than it did between 2012 and 2014. This is what investors need to remember. Apple isn't going to increase its sales by a defined figure every year. Some years are going to be huge like 2015 ($51 billion) and some small like 2014 ($12 billion). This is why one needs to look at the stock over a 10 year period before making a long term investment. Why? Well, if its main fundamental metrics are growing over a 10 year period, its improbable that the company's growth trajectory will come to a grinding halt.
|Years Of Dividend Increases||5 Years - Pass|
|Free Cash Flow||$55 billion (10-Year Trend Is Up) - Pass (Very Important For Dividend Investors - Dividend Currently Is 2.46%)|
|Revenues||$227 billion (10-Year Trend Is Up) - Pass|
|Operating Margins||29.4% - (10-Year Trend Is Up) - Pass|
|Price History of the stock||Up 802% in the last 10 years excluding dividends - Pass|
|Healthy balance sheet||Total assets = $305 billion (10-Year Trend Is Up) - Pass|
|Resistant to recessions?||Earnings Per Share continued to rise during the recession of 2008 - Pass|
The fundamental metrics illustrate above that the company is still growing strongly over the above mentioned time period. I have learned in my investing career that you have to trust the track record of your underlying and temporary setbacks should be seen as opportunities instead of adversity. For example, Apple presently has an earnings multiple of 10.3 and a sales multiple of 2.3. Both of these valuation metrics are well below the company's average but here is the real kicker. If we look at a chart of the Nasdaq Composite (INDX:COMPX), we can see that the trend line I have drawn hasn't been broken through yet.
Nasdaq bears believe that the market is ready to drop down into a secular bear market decline but I'm having none of it. Why? Well if you look at other indexes such as the S&P 500 (INDX:SPAL) and Russell 2000 (INDX:RUT.X), both have easily broken through their 7-year cycle trend-lines which in my opinion illustrates that a fresh new bull market is ensuing in US equities. The Nasdaq will be next to follow and Apple won't be left behind. Why? Well, the higher the Nasdaq goes, the more component stocks valuations will get out of whack. The bigger the divergence between Apple and its competitors, the more smart money will be attracted to Apple for the perceived value it would possess at the time. Also, when you factor in its rising dividend, dividend investors will also be looking for value and yield which will bring another subset of investors to the table. Adding all these factors up, its obvious that now is the time to start scaling into Apple stock
To sum up, I see Apple as a strong buy at the moment for a variety of reasons. Sentiment has never been more bearish although its fundamentals are still exceptionally strong which will be aided by a rising Nasdaq. I re-iterate that we will see Apple stock well over $100 a share in 2016.