In spite of constantly innovating and delivering revolutionary products, the shares of Apple Inc. (NASDAQ:AAPL) are languishing at 52 week lows. The company has been hitting solid top and bottom line numbers in the last few quarters, and still the overall skepticism around the company is unjustifiably high. There are three compelling reasons why Apple Inc. (NASDAQ:AAPL) will regain its former glory.
Product pipeline will deliver
Leading companies around the world across numerous sectors have used secrecy very effectively as a game-changing tool to overcome competitors. Apple’s rivals, Google Inc (NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN) have built-up mega fortunes based on this notion, by simply keeping their mouths shut.
The market as a whole, has been largely discounting Apple’s ability to churn out revolutionary products. Along with rising competition from Google Inc (NASDAQ:GOOG)’s Android OS, Apple’s decision to not reveal much about its upcoming product pipeline has played a major role in the recent sell-off.
Apple Inc. (NASDAQ:AAPL) currently sells a wide suite of products from handsets, tablets, PCs, music players, and a wide range of accessories, and has a thriving digital media outlet and apps platform. With such a wide breadth of product and service expertise across hardware and software, Apple can easily innovate based on its previous home-runs and maximize R&D efforts on key products that will appeal to the masses.
So a cautious investor should overlook the market speculations surrounding the company’s lack of visibility about its future product pipeline, and look at the company’s track record of delivering high quality consumer electronics products. And user acceptance of such products shouldn’t be a major headache, as the company has a huge following of Apple enthusiasts across the globe.
Increased penetration in growing markets
Apple Inc. (NASDAQ:AAPL) has been boosting its market share in the U.S., and now holds almost 39% market share of smartphone subscribers in the country, according to comScore. However, the bigger concern for most investors has been the increased competition coming from Android-based devices worldwide. Samsung has been producing devices that are relatively lower-cost using Google Inc (NASDAQ:GOOG)’s Android and gained substantial amounts of market share as a result. And to address the incremental competition, investors and analysts alike have stated that Apple will launch lower priced handsets.
As Apple’s addressable market in the U.S. and other developed markets narrow, the growing regions of the world will be of more importance to the company. And Apple has stated that they are evaluating the possibility of launching a lower cost iPhone but will not sacrifice quality, and rightly so. The company’s immense brand value will play a major role in its ability to gain more consumers, as it turns even more towards the global market. In the most recent quarter, 61% of Apple Inc. (NASDAQ:AAPL)’s total sales came from International markets and going forward this will trend upwards.
Compelling valuations; Sizable buy-backs will be value enhancing
In 1Q FY2013, Apple hit 4 new records, and all of them were vital statistics. Apple sold a record number of iPhones and iPads, as well as scored record high quarterly revenues and net profits. And the market rewarded the company with a massive sell-off, because of a relatively lower gross margin and a slight miss on the overly rosy sell-side expectations.
Apple’s current and forward P/E multiples of 9.5 and 8.5, portrays that the market doesn’t expect the company to grow at all. However, the earnings multiple placed by the market on a company that has been growing at a rapid rate is well below publicly traded peers including Google and Amazon. Even after applying a sizable haircut to Google’s current and forward earnings multiple of 24.2 and 14.6 on Apple, yields a much higher value for the iPhone maker.
Due to the recent sell-off, Apple Inc. (NASDAQ:AAPL)’s dividend yield went from being decent to being great. And the company has cash reserves in excess of $137 billion. On top of that, the company is generating substantial amounts of cash flow from its operations as well, Apple earned a staggering $23 billion in the last quarter alone.
And the company should boost its current share-repurchase plan as the company’s stock is at 52 week-lows. While some investors have stated that a huge buyback to the tune of $30 billion-$40 billion might impact the company’s US cash reserves, it can easily take on debt and repay using funds tucked away overseas. A big share repurchase at current share prices will create substantial amounts of shareholder value. And lastly, an increase in cash dividend is also a realistic likelihood in the near-to-medium term, as it will increase shareholder optimism substantially.
The Takeaway
At current levels, Apple Inc. (NASDAQ:AAPL)’s shares are quite cheap. The company has a strong history of introducing products that are wildly popular amongst consumers. As the company launches newer products, and makes its way into newer territories, the company’s earnings will get a major ramp.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google.
