Investor sentiment in technology can change quickly. Apple Inc. (NASDAQ:AAPL) had previously fallen out of favor on Wall Street with the uncertainty of what its next great product would be and worries about a shrinking gross margin. However, the recent dividend boost and share buyback program has shifted the negative sentiment to the positive side.
Here’s a glance at Apple Inc. (NASDAQ:AAPL)’s net sales for Q2:
| Product | Change in Net Sales y-o-y | % of Total Net Sales | Q2 Net Sales |
|---|---|---|---|
| iPhone | + 3% | 53% | $22.9 billion |
| iPad | + 39.6% | 20% | $8.7 billion |
| Mac | + 7.4% | 12.5% | $5.4 billion |
| iPod | – 20.3% | 2.2% | $962 million |
| iTunes, Software, Services | + 29.7% | 9.4% | $4.1 billion |
| Accessories | + 15.4% | 3.2% | $1.4 billion |
There is positive growth in each product category except for iPods. It is interesting to note that the less thought of iTunes, software, services, and Accessories categories are growing, and together comprise 12.6% of net sales. That is now higher than the net sales of the Mac.
The market doesn’t run-up in a straight line for too long without pullbacks along the way. I think Apple Inc. (NASDAQ:AAPL)could outperform the market in the near-term as its valuation remains below the market and as sentiment has shifted to the positive side for the company.
Google Inc (NASDAQ:GOOG) is now valued higher than the market, and much higher than Apple with a trailing P/E ratio of 24.8, and a forward P/E of 15.5. This premium valuation could cause Google’s stock to correct or pause a bit in the form of downward or sideways price action. Google is expected to grow earnings at about 15% per year for the next five years. This is lower than Apple Inc. (NASDAQ:AAPL)’s expected earnings and Google Inc (NASDAQ:GOOG) does not reward shareholders with a dividend.
Samsung is also valued higher than Apple with a trailing P/E ratio of 12.9 and a forward P/E of 12.3. Samsung is eating into Apple’s market share with its less expensive smartphone offerings. However, Apple still maintains a loyal following with its perceived device & software quality and user-friendly ecosystem. Samsung has its place in the market as the price-conscience choice, while Apple Inc. (NASDAQ:AAPL) maintains its status as the premium brand.
Apple was in need of some strong catalysts to get the stock back in vogue on Wall Street. It looks like we are starting to see some of these catalysts already. The dividend was just recently increased by 15%. The stock repurchase plan was increased from $10 billion to $60 billion, of which $1.95 billion was used in the first three months of the year. The share repurchase program is expected to be completed by December 2015. These are two positive catalysts that make Apple Inc. (NASDAQ:AAPL) attractive as an investment. I think that Apple’s plan to return money to shareholders has caused the stock to bottom out and reverse course.
There are a few likely business catalysts that could help the stock recover further. One of them is getting the iPhone carried by China Mobile, the world’s largest cellular operator with 710 million subscribers. This would help generate significantly more revenue for Apple. Another possible catalyst includes upgraded versions of existing products that could create excitement for consumers. Current Apple Inc. (NASDAQ:AAPL) customers are loyal and some of them insist on having the latest model. Of course, there is the possibility of a new product category being introduced. There have been rumors of an actual Apple television and a wristwatch, but this remains to be seen.
I like to take an objective view and look at where the company currently stands and where it is going. We already know that by standard measures, Apple is undervalued. Therefore, the stock is positioned at a nice starting point. Apple is expected to grow earnings annually at about 21% for the next five years. If these expectations are met, the stock could double the market’s performance over the next five years.
I think that it is likely that Apple Inc. (NASDAQ:AAPL) will find a way to get China mobile as a carrier, giving the company access to many more customers. Although the gross margin has shrunk and may continue to shrink with lower-priced products, I think that ultimately, earnings growth will be the bigger catalyst in the long-term to allow the stock to climb higher.
The article Apple’s Comeback Is Likely to Continue originally appeared on Fool.com and is written by David Zanoni.
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