Apple: Looking Past the Recent Weakness

Apple (AAPL) has faced a difficult time on the stock market this year with its shares down close to 2% so far. A key reason why Apple shares have dropped of late is because of weakness in China, the world's biggest smartphone market. However, investors should stay invested in Apple for the long run as the company's financial performance has been strong of late and its pipeline of new products will lead to growth in the long run.

Why Apple's robust performance will continue

Last quarter, Apple's revenue was up 33% year-over-year, while its earnings came in at $1.28 per share.

In fact, Apple's net income came in at $10.7 billion, an increase of 38% as compared to the year-ago quarter. The reason behind Apple's rapid growth is its strong product line-up, with sales of the Mac and the iPhone driving sales, along with growth in revenue from services and the introduction of the Apple Watch.

More importantly, Apple posted solid operating cash flow of $15 billion last quarter, and returned over $13 billion to shareholders through repurchases. This indicates that Apple is a shareholder-friendly company as well, which is a positive since its financial performance will continue improving going forward.

This is because Apple should continue delivering impressive year-over-year growth in sales of its products, solutions, and services, which will help the company generate robust top line growth. This will encourage Apple's management to return more cash to shareholders, which will eventually improve shareholder returns.

Products and partnerships to drive growth

As mentioned above, new products and partnerships will drive Apple's growth going forward. Apple recently launched the iPod touch in a set of new colors that include blue, pink, gold, silver, and space gray. The iPod touch allows customers access to iOS, the App Store, and Apple Music. The launch of the iPod in different colors is estimated to significantly expand the customers' engagement with Apple products and drive the company's top line growth.

In addition, Apple is taking steps to enhance its partnerships with key players to increase the addressable market. As an example, Apple and Cisco recently entered into a partnership to develop a fast lane for iOS business users by redesigning Cisco networks for iOS devices and apps. This move will make the iPhone compatible with Cisco's enterprise culture, leading to superior teamwork on the iPad and the iPhone.

Positive analyst sentiment

Although shares of Apple have declined of late, Bill Shope, an investment analyst at Goldman Sachs, remains optimistic about the growth prospects of the company. His thesis is driven by the company's innovative product pipeline and service sales, primarily due to higher confidence in the sustainability of its brand power. As a result, the agreement of Apple with Cisco will create superior iOS business users and is estimated to accelerate the growing customer traction for Apple's products and services.

In addition, TheStreet Ratings Team rates Apple as a Buy, with a ratings score of A. The bullish rating is primarily driven by several strengths that should allow the stock to outperform most other stocks. Apple's key strengths are observed in several areas such as its robust stock price performance, solid earnings per share growth, impressive net income growth, outstanding revenue growth, and significant return on equity. Meanwhile, the consensus estimate among 52 polled investment analysts evaluating Apple suggests that the company will outperform the market.


Overall, investors are advised to go long Apple due to its attractive valuation. The company has trailing and forward P/E's of 12.46 and 11.01, respectively, which is way better than the industry's average P/E of 18.82, depicting undervaluation. Additionally, the PEG ratio of 0.85 also indicates that the stock is undervalued, especially considering that it has a robust profit margin of 22.62%. Hence, in my opinion, investors should go long Apple as the stock will continue getting better in the long run.

Published on Sep 3, 2015
By Harsh Singh Chauhan

Copyrighted 2020. Content published with author's permission.

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