For years, Apple Inc. (NASDAQ:AAPL) was the perfect company for a large-enough-to-be-diversified, but small-enough-to-be-manageable stock portfolio. But the tech giant’s once high-flying shares have recently started sinking. If all your holdings had to fit on a 20-company punch card, would Apple Inc. (NASDAQ:AAPL) still deserve one of those precious spots?
Growing, but how fast?
For over a decade, Apple Inc. (NASDAQ:AAPL) saw fantastic growth rates, regularly exceeding 30%. iTunes, iPod, the iPhone and iPad all wowed consumers and won perpetual Apple Inc. (NASDAQ:AAPL) customers. On top of that, Apple Inc. (NASDAQ:AAPL) developed a loyal computer following, making the company all-encompassing in households that used a Mac.
Today, growth has bottomed out in the recent quarter, at just under 1%. If this is a harbinger of things to come, then Apple Inc. (NASDAQ:AAPL) is in trouble. However, this “no” growth rate represents the apparent end of a product cycle, since it has released no substantially new products for several quarters.
Apple recently hinted in its recent quarterly conference call that it is about to begin a new product cycle. This could be just in time, because if blog and media grumblings are any sign, there is pent-up demand for a set of updated products.
Expected to be coming first are new iPhones, including a less expensive version for emerging nations where the population is just beginning to move to data enabled phones. Indeed, over the next two to three years, estimates from the International Telecommunication Union indicate that about a billion new smartphone users will come to the market, raising the number to approximately 3 billion.
Apple currently has about 17% of global market share for smartphones, a distant but significant second to Google’s Android phones. If it approaches that percentage for emerging nations, Apple would dramatically increase its number of customers. Given the stickiness of Apple customers, an increase of potentially tens of millions new users is significant even for a company so large.
Apple’s stickiness stems largely from the multiple products it offers, in particular music, books and cloud storage, as well as, the inter-connectivity of its devices. For example, according to a recent Raymond James report, the iPhone’s retention rate is nearly 90%.
The report also demonstrates that iPhone does relatively better in more affluent markets, which bodes well if the global middle class indeed continues to grow. If Apple does launch a less expensive phone, it could lead to long-term customers who spend more over time as their financial circumstances improve.
Apple’s 2010 entry into the e-book market demonstrates its strength. Here, Apple has used the tablet segment leading iPad to quickly become a major player in the fast growing $4 billion per year e-book space. Long-established book seller, Barnes & Noble, Inc. (NYSE:BKS), whose Nook claims 2% of the tablet market, already pales in comparison to Apple iPad and Amazon.com, Inc. (NASDAQ:AMZN)’s Kindle. Apple’s ascent has already contributed to Barnes & Noble, Inc. (NYSE:BKS)’s decision to exit or modify its e-book business due to the massive losses it has incurred on its Nook sales.
Zack’s consensus earnings growth estimate for Apple over the next five years is 14%, with 2014 shaping up around 10%. With over a billion new consumers in play and likely pent-up American demand, I believe Apple should meet expectations and could easily exceed going forward.
Valuation matters…
Apple has a trailing P/E ratio of about 11 and a forward looking ratio of about 10. Compared to the S&P 500’s 19 P/E , Apple compares favorably to much of the market.
Apple is also the rare large company that still appears on growth stock screens. Indeed, one of the better screens out there, Joel Greenblatt’s Magic Formula, places Apple alongside much smaller growth companies. Various screens at the American Association of Individual Investors also flash Apple as an intriguing growth at a reasonable price stock.
Adding to Apple’s share potential is the recent decision to buy back approximately $60 billion (yes, billion with a “b”) worth of its stock. Reducing the float by that much from an approximately $400 billion market cap should have positive results on share price, even if the company fails to grow going forward. There is a 2.7% dividend to boot.
Foolish Bottom Line
With Apple placing first or second in so many technology segments, offering multiple avenues for sustained earnings and having a cheap valuation, I am punching the card for Apple in the large-cap portion of my portfolio.
Kirk Spano and clients of Bluemound Asset Management, LLC have long positions in Apple stock. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. Kirk is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Is Apple Still a Punch Card Stock? originally appeared on Fool.com is written by Kirk Spano.
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