Apple: 3 Reasons It Might Be Time to Buy

Apple may still be 20% off its all-time stock highs, but three catalysts in particular over the next 12 months could help to close that gap.

Mar 13, 2014 at 8:45PM

Apple's (NASDAQ:AAPL) had a decent year with gains of 25%, but it still remains more than 20% off its all-time highs. But the company's deal with China Mobile (NYSE:CHL), new product launches, and new services to contend with the likes of Pandora (NYSE:P) and Sirius XM (NASDAQ:SIRI) could indicate now is the time to buy Apple shares.

It's time for growth in China
In 2014, Apple is expected to sell nearly 180 million iPhones, which gives it a 14.9% global market share. While Apple's presence in the U.S. is high, the company has failed on many levels to monetize China, a massive market where Apple needs to succeed. In fact, Apple sold just 22 million iPhones in China during 2013.

Last year, China shipped 360 million mobile devices, and this year that number is expected to grow to 450 million. Apple's relatively small 7% market share in China has taken a backseat to the likes of Samsung, Lenovo, and also China-based companies like Yulong. There are two things all these leaders have in common: partnerships with China Mobile and large screen devices.

For the first part of the equation, Apple finally signed a deal with China Mobile last year after being absent from its 710 million subscriber network during all of its success. This deal clearly works to the benefit of Apple but also for China Mobile.

China Mobile is selling the iPhone 5C in China for $733, which means it's not subject to the same subsidized pricing offered by U.S. telecom giants like AT&T and Verizon. Essentially, China Mobile makes a profit from the device when it's sold rather than having to wait over the life of a two-year contract to generate a profit. As a result, China Mobile can attract new subscribers who may want to purchase an iPhone and won't suffer immediate margin pressure thanks to the deal.

With that said, there is still the problem of Apple's market share, which might naturally be boosted thanks to the China Mobile deal. But as previously mentioned, there is a link between screens greater than 5 inches -- iPhone's screen size is 4 inches -- and leaders in the space. Thus, back in February a leak from China on showed pictures of an early stage iPhone 6, showcasing screen sizes between 4.7 and 5.7 inches.

U.S. consumers have been begging for a larger iPhone for the last two years, which Apple has yet to provide. But to capitalize on the China market, it finally looks as though Apple has an incentive. As a result, its China Mobile deal combined with larger iPhones provide reasons to be optimistic for Apple investors.

iTunes Radio makes itself heard
Apple is entering the music space with authority, offering a mobile service that's been compared to Pandora and now penetrating the in-car arena with a service that some believe will cripple Sirius XM.

First, in less than six months, iTunes Radio has already become the third most popular U.S. music streaming service, controlling 8% of the market with 20 million users. Clearly, this competes with Pandora, which owns a 31% share.

Earlier this month shares of Pandora fell from all-time highs after it reported slower listener-hour growth relative to prior months. The 11% monthly growth was impressive, but the company's decision to stop reporting monthly listener growth is what alarmed investors. Given iTunes Radio's growth, perhaps it's already starting to affect Pandora and, if so, it has a lot of share to gain.

CarPlay: Coming to a driveway near you!
Then, there's CarPlay, an infotainment system that incorporates Apple's operating system, Siri, iTunes, etc., to send messages, listen to music, make calls, and for navigation. The first version of CarPlay will be found in luxury auto makers Ferrari, Mercedes, and Volvo. But Apple already has deals with other manufacturers like GM, BMW, Nissan, and Honda that will roll out in the near future.

With the service not yet launched, we don't know exactly how Apple will be compensated from auto manufacturers, or if it will lead to increased iTunes purchases. Still, Sirius XM has built a near $4 billion a year business by operating exclusively in this space. Since November, shares of Sirius have fallen 12%, and with CarPlay customers not paying for service and able to listen to artists and songs of their choice, it is likely that Sirius XM's decade old technology will feel the heat of new-age competition. Regardless, CarPlay and Apple's long line of manufactures bodes well for investors.

Final thoughts
Out of all these developments, market share in China is the only noted event that could drive substantial year-over-year fundamental growth. In regard to CarPlay and iTunes radio, both combined might only create $1 billion in revenue this year. But if successful, it's the innovation involved with these two services that might spark optimism, which consequently leads to gains.

As for Apple boosting its presence in China, gaining China Mobile and offering iPhone 6 models in different sizes can't hurt its chances to grow. With that said, even a 3% market share gain through the addition of China Mobile and new launches could add an extra 13.5 million units. If Apple exceeds expectations by this number, its stock is most certainly to rise.

Combined, these catalysts over the next year make Apple an attractive stock to watch, buy, and hold. Furthermore, at 13 times earnings, with a dividend of 2.3%, and the company buying-back stock, there is small downside risk. Thus, Apple looks like a golden opportunity.

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Brian Nichols owns shares of Apple. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple, China Mobile, Pandora Media, and Sirius XM Radio. 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.

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