Why It May Be Too Early to Write Off Apple
Once the quintessential glamour stock, Apple (AAPL) has been anything but glamorous since hitting its record high price in 2012. Excluding enhancements to existing products, the company hasn’t unveiled anything truly new since it launched the iPad in April 2010. With the death of visionary CEO Steve Jobs 18 months later, it’s no wonder investors worry that Apple is no longer a growth company. We think, though, that Wall Street has gotten too pessimistic and that reports of Apple’s descent into irrelevance may be premature.
The performance of both the company and the stock tell the story of Apple’s fall from grace. The share price peaked in September 2012 at $705, representing a more than 100-fold increase since 2003. But over the next eight months, as investors began to sense a slowdown in growth, the shares dropped 45%, to $385.
And although the stock has recovered to $525, it’s clear that investors were onto something. Earnings per share skyrocketed from 10 cents in 2003 to $44.15 in 2012, but since the fourth calendar quarter of 2012, Apple’s year-over-year profits have fallen for four straight quarters. If analysts are right, Apple will break out of the rut, ever so slightly, when it reports results for the January-March quarter on April 23. On average, they see Apple earning $10.17 per share, up from $10.09 in the same period a year earlier.
Apple’s stock is certainly cheap, which may explain why it held up well during the recent high-tech pullback. Apple trades for 12 times estimated earnings for calendar year 2014, compared with 15 and 20, respectively, for such rivals as Microsoft (MSFT) and Google (GOOG). Standard & Poor’s 500-stock index sells for 16 times estimated profits. “There are no longer plenty of bargains out there, but Apple is one of them,” says David Rolfe, manager of RiverPark/Wedgewood (RWGFX), which has 9.1% of its assets in Apple. Rolfe believes the company will generate double-digit-percentage earnings growth over the next few years. He also expects Apple to raise its annual dividend, currently $12.20 per share. The stock yields 2.3%.
Paying more to shareholders won’t put much strain on Apple’s coffers. The company holds an unfathomable amount of cash and investments—nearly $160 billion. Another way to reward investors is to repurchase shares, and Apple is doing that with a vengeance. It has authorized buybacks totaling $100 billion through the end of 2015. Josh Spencer, manager of T. Rowe Price Global Technology (PRGTX), says the immensity of the buyback program suggests that Apple officials think the stock is a bargain. “Apple has gotten so aggressive on the buybacks that it seems like people at the company know something that we do not,” he says. “That is a clue you just can’t ignore.”
But cheapness alone may not be enough to bring back Apple’s glory days. Investors want to see a resumption of growth—and more than the piddling gains expected for the January-March quarter.
One way to generate growth is to introduce new products. Apple, which in the past year hired a top designer from Nike and the chief executive of fashion house Yves Saint Laurent, is expected to soon unveil an iWatch or some other form of wearable tech to rival Samsung’s Galaxy Gear watch, rolled out last fall.
And although you can argue whether updates for existing gizmos qualify as new products, you can’t underestimate their importance to Apple’s results. On tap this fall is a new large-screen version of the iPhone, which generated more than half of the $171 billion in revenue Apple collected in the fiscal year that ended last September 30. Other products and updates may also be on the horizon. Apple spent $4.5 billion on research and development in the 2013 fiscal year, up 32% from the previous year.
Apple could also boost business by partnering with other companies. It is in talks with cable-giant Comcast (CMCSA) about teaming up on a streaming-television service that would use an Apple set-top box to show programming stored in the cloud. If the deal goes through, subscribers would be able to use Comcast’s cable systems to bypass congestion on the Web. Apple CEO Tim Cook has said that the Apple TV, which brought in $1 billion in sales in fiscal year 2013, is no longer a hobby but rather a serious line of business for the company.
Apple may also have a hand in the car of the future. Elon Musk, CEO of electric carmaker Tesla Motors (TSLA), is reported to have met with an Apple executive, fueling speculation about a partnership between the two companies. Apple announced in March that “CarPlay”—an integrated system for letting you use your iPhone through a car dashboard—will be available this year on models from five carmakers, including Honda Motors and Mercedes-Benz.
With its huge cash stash, Apple should have no trouble expanding by buying technology companies. One of its best-known deals was the purchase in 2010 of Siri, the firm behind the virtual assistant first introduced in the iPhone 4s. In 2012, Apple bought AuthenTec, whose fingerprint sensors are used in the iPhone 5s. The company has quietly continued its buying spree, snagging app developer SnappyLabs and app testing company Burstly earlier this year. Although these deals aren’t of the same magnitude as the planned $19 billion purchase of WhatsApp by Facebook (FB), they could pay off down the road.
Finally, Apple has room to grow in both emerging and established markets in Asia. The percentage of sales coming from China and Japan has increased each year for the past three years. When Apple introduced the lower-cost iPhone 5c last fall, it made it clear that the company was serious about gaining share in emerging nations with growing numbers of people joining the middle class.
The bottom line is that if everything falls into place, Apple’s bottom line could once again begin to expand. If that happens, the stock is likely to perform well. If not, the stock will continue to disappoint shareholders.