Tim Cook, Apple’s CEO, sent an email to Jim Cramer at CNBC with a very rare mid-quarter comment on the company’s business. Cook addressed investors concerns about Apple’s iPhone sales in China with comments that sales remain strong through July and August. I believe that Apple’s stock has become oversold and with it trading at less than a 10x PE multiple when you remove $17 in net cash per share this is a very good entry point. (Note that I own Apple shares).
Investors are worried about China
Over the past two months investors have become very worried about the severe downturn in China’s stock market and what it could mean for Apple’s business. The Bears on the stock have used this to reinforce their position that iPhone sales could falter even more than they estimate without any data points to back up their position. I would note that in a lot of situations there isn’t hard information and at the margin the weakness in the Chinese stock market should at best be neutral and negative to some degree.
However there is some information that is positive for Apple’s China business besides Tim Cook’s statements. The first is the strong increase in 4G subscribers that China Mobile and China Unicom experienced in July. Second UBS’ Steve Milunovich’s Evidence Lab survey points to 50 million or more iPhones being sold in the September quarter and lastly Bernstein’s Toni Sacconaghi put together a number of thoughts on how Apple could sell more iPhones in 2016 than 2015.
Tim Cook wrote that Apple’s China business is in good shape
CNBC’s Jim Cramer emailed Tim Cook over the weekend and Cook replied saying that “we have continued to experience strong growth for our business in China through July and August. Growth in iPhone activations has actually accelerated over the past few weeks.”
He also added “I continue to believe that China represents an unprecedented opportunity over the long term as LTE penetration is very low and most importantly the growth of the middle class over the next several years will be huge."
Stock is trading below a 10x multiple
Apple has about $17 in net cash per share when you take into account its debt and additional taxes it would have to pay on overseas cash if it brought it back to the US. While the shares traded down to $92 at $106 it is trading at 9.1x fiscal 2016’s EPS estimate of $9.78. Also per a Morgan Stanley analysis Apple’s shares are underweighted to the S&P 500 benchmark by the largest 100 shareholders.
Along with the overall market Apple’s shares have rebounded today. The stock is outperforming the market since it is up slightly while the S&P 500 is down 2%. While the stock could move lower for long-term investors with the shares being oversold and such a low valuation I believe it is a good time to buy them.
