How Apple Intends to Dominate in 2014

Apple's partnership with China Mobile and a strong U.S. holiday shopping season mean its shares might not stay cheap for long.

Jan 21, 2014 at 2:00PM

The stage is set for Apple (NASDAQ:AAPL) to blow away expectations in fiscal 2014. Investors have many reasons to be excited for what the upcoming year holds, including what's likely to have been a great holiday quarter, and the much-awaited deal with China Mobile (NYSE:CHL). After a tough 2013, in which Apple struggled amid an environment of rising costs and no meaningful product launches, the new year couldn't come soon enough.

Not only does Apple have strong momentum in its underlying business, but because of its relatively cheap valuation, a unique opportunity now presents itself.

A "watershed" moment
That's how Apple Chief Executive Officer, Tim Cook, described his company's partnership with China Mobile, which has finally closed. Starting Friday, China Mobile will begin selling iPhones in China. The deal has received significant media attention, and rightfully so. China Mobile is the largest telecommunications carrier in the world, holding approximately 760 million subscribers.

The latest versions of the iPhone are already sold by other carriers in China, including China Telecom (NYSE:CHA). It's clear that China Mobile's competitors, including China Telecom, sense the partnership as a threat. In anticipation of the agreement between Apple and China Mobile, China Telecom announced it would slash iPhone prices by 15%.

Several key objectives fulfilled
The deal between Apple and China Mobile satisfies several of Apple's goals, the first of which is to retain the image of a premium brand. As Tim Cook stated on CNBC, Apple's vision is to produce the best products, not the most products. A cursory overview of the deal's pricing strategy proves as much. The 16-gigabyte iPhone 5s will cost about $874, while the 64-gigabyte version will be $1,139. While that level of pricing might seem prohibitive at first glance, China Mobile received more than 1 million pre-orders leading up to the big debut.

In addition, the partnership expands on Apple's stated goal of further penetrating the Chinese market. Apple sold more iPhones in China last quarter than ever before, and the agreement with China Mobile will only further Apple's growth in the country. Because of relatively low economic growth in mature nations like the U.S., meaningful growth in emerging markets represents the best growth opportunity for a huge company like Apple. Time Cook admitted as much during the interview, referring to China, specifically, as a key market.

China Mobile stands to benefit from the partnership as well. Its profits fell over the first nine months of 2013 due to rising costs and a lack of high-quality customers, and average revenue per user remained flat during the first three quarters of the year.

Of course, a major consideration from China Mobile's perspective will be the likely subsidies. China Mobile has not yet released this information, but will do so when it reports its quarterly results in March.

Valuation presents a compelling opportunity
Apple already had some strong momentum heading into the new year, as the holiday shopping season in the U.S. looks strong. Retail sales rose in December at a 0.7% rate, excluding automobiles. This is seen as the "core" rate of retail spending, and December's growth rate blew away expectations, which called for a 0.3% increase.

The prospect of a strong holiday shopping season in the U.S., and the likelihood of additional growth in China, means Apple has the wind at its back. Consider, too, that Apple shares trade for just 14 times earnings, well below the valuation of the broader market. Apple is a company with increasing momentum and a compelling valuation, meaning investors are set up very well in 2014.

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Bob Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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