Apple Stock Still Has Room to Run

After Apple's (NASDAQ: AAPL  ) strong performance over the past six months -- shares are up more than 40% since late June -- some investors are wondering whether Apple stock is running out of steam.

AAPL Chart

Apple YTD Stock Chart; data by YCharts.

However, Apple still has plenty of upside. It's worth remembering that Apple stock is still 20% below last year's all-time high; much of the recent run was simply reversing the excesses of the prior sell-off. Most importantly, analysts' earnings estimates are probably too low in light of recent developments. If Apple returns to solid earnings growth in 2014, Apple stock will probably benefit from further multiple expansion.

Big product rollout
Apple has significantly improved its product portfolio in the past three months. In September, the company launched the iPhone 5s and the iPhone 5c. The top-of-the-line iPhone 5s has been the best-selling phone at all of the four big U.S. carriers for each of the past three months, according to Canaccord Genuity analyst Michael Walkley. The iPhone 5c has also performed relatively well, holding the No. 2 or No. 3 position at each carrier in all three months.

Apple's iPhone 5s has sold incredibly well since launching in September. (Photo: Apple.)

The iPhone 5s has also proved popular abroad, driving strong share gains in critical markets such as Japan and China, according to Counterpoint Research. In fact, the research firm found that the iPhone 5s, iPhone 5c, and last year's iPhone 5 took three of the top four spots in terms of global smartphone sales for October.

In October, it was time for Apple to roll out new iPads. The new iPad Air and iPad Mini Retina received rave reviews. Apple also kept the iPad 2 on sale at its customary $399 price point and dropped the price of the original iPad Mini to $299.

The new iPad lineup should offer solid profit margins for Apple, while the reduced entry-level price point allows Apple to pursue market share gains. Some big iPad Mini promotions around Thanksgiving weekend made it even more affordable, boosting sales. Wal-Mart (NYSE: WMT  ) offered the most aggressive discount, and it sold 1.4 million tablets on Thanksgiving Day, most of which were probably iPad Minis.

The new iPad Air has been incredibly well received. (Photo: Apple.)

While Apple hasn't released any sales statistics since the iPad launch, adoption of the iPad Air seems to be especially strong, based on usage data provided by Fiksu. All in all, I continue to expect strong sales growth for the iPad this holiday season.

Expanding distribution
A steady stream of high-quality new products is clearly critical for keeping Apple's sales (and Apple stock) rising. However, expanding distribution is also incredibly important. In previous years, Apple's addition of new carrier partners, such as Verizon, has been critical for driving iPhone sales growth.

Earlier this year, Apple reached one critical new distribution deal. NTT DoCoMo, Japan's largest wireless carrier, began selling the iPhone when the latest models were released in September. Apple was already the top-selling smartphone brand in Japan, but with the iPhone now available on all three major Japanese wireless carriers, Apple is absolutely dominating the market. Of all the smartphones sold in Japan in October, 76% were iPhones!

More recently, Apple appears to have reached a distribution deal with China Mobile (NYSE: CHL  ) , which is the world's largest wireless carrier, with more than 750 million subscribers. Some of the more bullish estimates of how this will affect Apple may be overly optimistic, but having China Mobile as a partner could plausibly boost Apple's iPhone sales by 10 million units per year initially. That would add $2-$3 to Apple's EPS.

Still cheap
While Apple stock has surged in the past six months, its valuation is still very reasonable. Shares currently trade for about 13 times expected earnings for the fiscal year ending in September. However, it's interesting to note that analysts' estimates have barely budged in the past few months despite lots of positive news about Apple.

Two months ago -- before the iPad rollout and when the timing of a China Mobile deal was very uncertain -- analysts expected Apple to deliver EPS of $13.79 for the current quarter and $43.10 for the full year. Today, they expect EPS of $14.01 for the quarter and $43.54 for the year -- up just 1%-2% from the prior estimate.

In other words, most analysts' estimates are probably too conservative. Today, we know that the new iPads have been extremely well received and that the NTT DoCoMo deal has solidified Apple's dominance of Japan. It is also fairly certain that the iPhone 5s and iPhone 5c will launch on China Mobile in the next week.

Next week, the iPhone 5c is likely to launch alongside the 5s on China Mobile. (Photo: Apple.)

Apple stock already has a lower earnings multiple than the stock market average. If the company puts up better earnings than analysts currently project -- which would imply double digit EPS growth this year -- it will look like even more of a bargain to many investors. (Also, recall that Apple still has more than $100 billion of net cash on its balance sheet.)

Outperformance in 2014
With Apple's EPS growing again and likely to exceed analysts' current estimates, investors are likely to become more optimistic about Apple stock in 2014. The new products launched over the past three months and the new distribution channels opened will keep Apple growing at a steady pace in 2014, and should put to bed fears that Apple would collapse in the absence of Steve Jobs.

With several new products potentially in the pipeline for 2014 and beyond -- such as a larger iPad, a smartwatch, and/or a smart TV -- the long-term picture looks good, too. This growth potential could give Apple a chance to challenge its all-time high above $700 at some point next year. In other words, Apple stock still has plenty of room to run.

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Read/Post Comments (8) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 14, 2013, at 2:26 PM, skyisfalling wrote:

    What happened to the Law of Large Numbers, may be 2014 will be an exemplary year for Apple but what will happen in 2015! and how about 2016 and what about the market capital?

  • Report this Comment On December 14, 2013, at 6:43 PM, TMFGemHunter wrote:

    @skyisfalling: I'm not sure what you mean by the "law of large numbers". There's no reason why Apple stock has to remain below some artificial limit. If the company can grow EPS consistently, the stock WILL go up, sooner or later.

    Apple's high market cap didn't stop the stock from rising rapidly during 2012. The only reason why Apple fell back to Earth was that the company's earnings suddenly went from rapid growth to contraction. I think that Apple is back on an earnings growth trajectory now, and that's all that really matters for a long-term investor.

    Adam

  • Report this Comment On December 14, 2013, at 8:13 PM, johnestromjr wrote:

    Adam, If Priceline is over $1000 per share and Google is over $1000 per share then Apple should be over $1000 per share. Then, of course, there is ScamAzon with a P/E of over 1400 yet the "experts" continue to tell us what a great stock it is. Yeah, right, sure it is.

  • Report this Comment On December 17, 2013, at 6:07 PM, digndig wrote:

    Apple is the strongest company. Period. With a P/E of 14 it is a BUY for 2014 (and 2015!) and will likely be the SMARTEST BUY for a long time. They are a brilliant tech company, they are a highly successful retail company. In one year, their profits $39B could buy almost all of the gold companies based on their market caps. AAPL can be whatever they want to be. They will continue to buy back stock but they should also raise their dividend, thereby becoming the darling of every institutional investor. Yes I am long AAPL.

  • Report this Comment On December 17, 2013, at 6:13 PM, user5701 wrote:

    By "40% up since June", you mean it's still $150 below its all-time high of approx $700 from Sept 2012, right? Numbers sure are fun to twist!

  • Report this Comment On December 17, 2013, at 8:30 PM, mikecart1 wrote:

    Apple will be one of 2014's Best Stocks to Own. I'm calling it now!

  • Report this Comment On December 18, 2013, at 8:06 AM, cmalek wrote:

    @digndig:

    The garbage heap of stock market history is littered with "the SMARTEST BUYS" stocks.

  • Report this Comment On December 20, 2013, at 6:27 PM, soxforever wrote:

    cmalek: You're entitled to your opinion on AAPL. However, whether you're in or out, AAPL will be selling at $700 in 2014 and you're going to wish you had bought 100 shares. The iPhone 6 with it's choice of 2 larger screens, and additional product launches will be a huge shot in the arm for AAPL. Earnings on 1/23 will be amazing, China Mobile will get done, and the dividend will be increased. The train is leaving the station and it's a shame you won't be on it.

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