Mitch on the Markets

In the US today, it'sdifficult to find a middle class household without an Apple product somewhere. Our lives in the digital era have a lot to do with this, but Apple’s sheer dominance in sales and innovation is the real engine that is pushing their stock higher. 

Take last quarter for example. Apple Inc. (AAPL) posted record quarterly revenue of$74.6 billion and a world record quarterly net profit of $18 billion (or $3.06 per diluted share). These results compare to last year’s Q1 revenue of $57.6 billion and net profit of $13.1 billion, or $2.07 per diluted share. That’s 30% revenue growth in one year! For context, in an entire year, Costa Rica produces about half of what Apple generates in just three months. 

The stock price has reflected the financial results. Apple shares rose over +37% last year compared to the S&P 500’s +13.6% gain. Since the bull market began in March 2009, Apple Inc. (AAPL) has soared over +870% while the S&P has climbed a lesser, but still quite formidable, +200%. You might be thinking this ship has already sailed. I think the ship is still sailing - and believe there may be plenty of time for you to get onboard. There are 3 reasons I think Apple’s stock price could move higher from here. 

Reason #1: Attractive Valuation and Earnings Growth 

Fundamentals, fundamentals, fundamentals. When a stock rises as much as Apple’s, the classic temptation for investors is to “chase heat,” ignoring the underlying fundamentals of a company. We need only refer back to the tech bubble of 2000 to remind us how this investor flaw can go terribly wrong. 

But Apple Inc. is still attractively valued even after years of stellar returns. Apple trades at 13x forward earnings and is coming off a year where they saw 48% earnings per share growth (with an operating free cash flow of $70 billion). Compare that to Facebook (FB), which trades at 29.34x forward earnings and pulls in $5.46 billion of operating free cash flow. Apple is clearly in a superior position fundamentally, at least for now. 

It would be hard for Apple to repeat 48% earnings per share growth in fiscal year 2015, but anything short of that would not be a huge disappointment either. The company doesn’t need that level of earnings growth for the stock to continue performing well. 

Reason #2: It’s Difficult for Money Managers to “Overbuy” Apple 

Apple is the largest publicly traded company in the world with a market capitalization of over $691 billion. As a result, many active money managers are restricted from owning too many shares as doing so can skew the weighted market capitalization of the portfolio. What poses a problem for money managers offers an opportunity in the marketplace as the demand for shares in aggregate is stifled to a degree. 

Reason #3: Innovation and Sales Growth are Likely to Persist 

Apple, Inc.’s latest financial figures were driven largely by record iPhone and Mac computer sales. In the last quarter alone, Apple sold 74.5 million units of iPhones, and international sales accounted for 65% of the quarter’s revenue. Apple dominates smartphone sales in Japan and made huge gains on Samsung in the rapidly growing South Korea marketplace. 

But it’s in China and India where Apple stands to grab market share and drive growth. In China, Apple controls only about 12% of the total smartphone market, and that’s after coming off of 45% annual growth in sales volumes in the year ending last November. If Apple can continue to see growth even close to those levels, the upside gains stand to be huge. 

The opportunity in India is even more compelling given that it is the most rapidly growing smartphone market in the world (and Apple barely has a toe in the door). Apple sold only one million iPhone units in India in the last three months of 2014 where 200 million smartphone users are expected by the end of 2015. Through the third quarter of last year, India saw 80% year-on-year growth of smartphone sales, yet Apple accounts for less than 2% of the entire market there. The upside potential for Apple is palpable as they’ve proven time and time again they know how to innovate, market and sell. I don’t expect they’ll fold to competition in China and India anytime soon. 

BTW – Apple Inc. is the largest holding in Zacks Focus Growth Strategy which drove a return of 18.37% return (net of fees) in calendar year 2014. The strategy handily beat its benchmark, The Russell 1000 Growth Index, which returned 13.05% in the same period. 

Good investing!

Mitch

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