A Huge Value Play Hiding in Plain Sight

Apple  (NASDAQ: AAPL  )  reached a new sales record after releasing its new iPhone 5s and iPhone 5c. Nine million combined units were sold in just one weekend. This injected positive momentum into the stock, and that's here to stay. 

Why Apple is a buy now
Apple's balance sheet demonstrates its incredible financial strength.

AAPL Cash and ST Investments Chart

AAPL Cash and ST Investments data by YCharts

The company has also decided to be more shareholder-friendly, planning to spend about $60 billion on share repurchases by 2015. Now is the perfect time for Apple to do this, because nobody likes it when a company overpays for its own shares. With a P/E ratio of only 12, Apple is a little cheaper than Microsoft at 12.6 times earnings, and much cheaper than Google at over 25 times earnings. 

Apple's current dividend yields around 2.60%, and there is also reason to believe that it will begin to increase it since the payout ratio currently sits at only 27%. 

A big potential catalyst
Research firm IDC thinks Apple could double its market share in China by next year due to a highly anticipated deal with China Mobile  (NYSE: CHL  ) . China's largest wireless carrier maintains a subscriber base of 750 million, which translates to around 63% of the country's wireless subscribers. Currently, China Mobile does not carry any iPhones, and since it is the largest carrier in the world's largest market for smartphones, Apple needs to strike a deal.

According to Chuck Jones of Forbes, this deal may come soon because both new iPhone models now support all 13 LTE bands, including the ones needed to work on China Mobile's network. This wasn't the case with the older models. Jones thinks the two companies will strike a deal later this year, or in the first half of 2014, citing the chairman of China Mobile, who indicated in August that the two companies were getting closer to a deal. The technology in the new iPhones that makes them compatible with China Mobile's network adds to his case. 

China Mobile has been growing its subscriber base at a slower rate than its smaller competitors, China Telecom and China Unicom. Adding the popular new iPhones, however, might be just what the company needs to jump-start growth in subscribers. It would also boost sales and possibly provide investors with an incentive to assign shares a higher premium. With China Mobile trading at a P/E of only around 11, an expansion of its multiple coupled with a pop in earnings could make shares appreciate quickly. The company also pays out an income-generating dividend that yields 3.50%.

A beacon to the future
Many see near-field communication, or NFC, as the way to pay in the future, so many were equally surprised that the technology was not integrated into the new iPhones. Apple announced the iBeacon back in June, a new feature for its new iOS 7 operating system. There's currently speculation that the iBeacon could be an NFC killer, because it has a much higher range than most NFC sensors and chips. Bluetooth Low Energy, or BLE, also has another advantage over NFC: it was specifically designed to consume smaller amounts of energy to conserve smartphones battery life. 

It's not just Apple either, with eBay  (NASDAQ: EBAY  )  betting big on BLE. eBay-owned PayPal introduced Beacon dongles that can plug into any electrical outlet. This will allow retailers, restaurants, and shops to establish a hands-free check-in and payment system for customers with a PayPal app. According to pcmag.com, PayPal's system enables transactions to take place without opening the app, turning on GPS, or even without a cellular signal. 

Currently the only way to own PayPal is to buy shares of eBay, which trade at around 27.5 times earnings. It is also expected to increase earnings rapidly, which explains why its forward P/E is only at around 17.5. The company looks cheap compared to its most serious threat, Amazon, which trades at 111.5 times forward earnings. There is also a chance that eBay may one day spin-off PayPal, unlocking even more shareholder value.

Euromonitor sees mobile commerce growing by 386% from 2012 to 2017, so the market is incredibly lucrative. PayPal is pioneering a better, more efficient m-commerce solution with BLE, and now it has Apple on board. This also means iPhones without NFC chips might not be such a big deal, especially considering the implications of the technology beyond just m-commerce. When the Internet of Everything begins connecting devices with sensors, allowing them to communicate and share data over the Internet, the iBeacon will come in handy

The bottom line
Apple is selling tons of iPhones and increasingly rewarding shareholders with buybacks and dividends. A deal with China Mobile will expand market share significantly. The iBeacon also positions the company to take advantage of m-commerce and the Internet of Everything. Now looks like a good time to establish a position in Apple.

 

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