- Very strong iPhone 7 plus sales will add to revenues.
- Strong institutional ownership should support the stock price in case of a sell-off.
- Apple stock valuation is not too expensive yet, and has good upside potential.
Apple Inc. (NASDAQ:AAPL) recently made a very strong rally with its stock closing at $113.57 on Friday 16th September 2016. From the low of $90 per share in early summer, Apple stock is up by an impressive 26%. What to do now if you missed this rally?
We will focus on 3 major catalysts that will form our investing thesis and conclusion on Apple stock. These catalysts are strong sales of new products released, valuation and technical analysis and lastly future growth and competition.
Apple's iPhone 7 Plus Is Already a Hit
Within the first week of the brand new iPhone 7 plus release, the phones were sold out in all available colors. This is the most expensive phone Apple has released and the initial sales trend, while it is still an early indicator, shows that a strong last quarter will very likely follow with increased unit sales and revenues. Revenues and sales drive profitability and Apple has a very healthy trailing twelve months operating margin of 28.55%. Recently, Apple introduced a program under which users can have a new phone each year by paying a minimum amount to replace their older smartphone. This smart move seems to have the potential to continue to boost sales as well.
Valuation and Technical Analysis
Apple stock has a current P/E of 13.4, lower than average P/E of the industry and the S&P 500 and lower than the 5-year average for the stock as well. Although Price/Book ratio for Apple is higher than relevant ratios for both industry average and S&P 500 and may be a concern, we like the steady rise in gross profit, net income and earnings per share for the last 5 fiscal years. A nice current dividend yield of almost 2% and a beta of 1.52 can add to a price momentum continuation. The fact that almost 60% of shares are held by institutional investors and mutual funds can add support in case of a potential sell-off. Expected 3 years earnings growth is about 8.68% which is reasonable and realistic and makes Apple stock both a value play and a growth pick.
Technical analysis is also bullish for Apple. The stock is trading above the 50 and 200 period simple moving averages, and while indicators like Slow Stochastics and RSI show overbought conditions, ADX indicator shows ADX+ line is the dominant line, meaning upside momentum is gaining so far.
Future Growth and Competition
Apple has many products, but the core of sales are iPhones, followed by iPads and Macs. What is impressive so far is the fact that Apple faces a lot of competition from Android smartphones, yet it continues to produce very strong sales numbers, attributable to its very loyal customer base and audience. With a trailing twelve months net profit margin of 21.70% and return on equity of 37.90%, we believe that at current levels Apple stock is interesting to watch as a potential portfolio add-on.
We are concerned with the recent Apple stock rally, as at current levels (closing price around $114 per share) the stock's impressive rally has raised questions about how much upside potential is left for the value investor. If you were lucky enough to have bought the stock at or around the $100 per share level we recommend the stock as a hold. We would suggest Apple stock as a buy, in case the stock undergoes a correction or a potential sell-off, at around $103.50 per share or about 10% off the current price. The stock has a high beta of 1.52 and if the stock market sees a correction then Apple stock could possibly correct by 10% as it moves more aggressively than the broader market. With the upcoming presidential elections and looming interest rate hikes by the Fed, stock market volatility could present plenty of buying or selling opportunities. For the long-term investor looking for exposure to Apple stock, our target price is set at $130.00 per share, or about 5% higher than the current 52-week high ($123.82 per share). We will be looking toward Q4, and will be monitoring Apple stock through the Christmas sales season.
Note: Sources used are Yahoo Finance, Zacks and MorningStar.