2 Reasons Apple, Inc. Stock Is a Buy

A look at Apple stock's valuation and catalysts headed into earnings.

Apr 22, 2014 at 9:45AM

Apple Store

Heading into Apple's (NASDAQ:AAPL) second-quarter earnings on Wednesday, it's helpful to have a useful framework on how to think of the stock. Shareholders and prospective Apple investors alike may be asking similar questions as the latest earnings report approaches:

  1. Is there potential upside to the stock at today's prices?
  2. Can Apple continue to grow its business?
  3. Is the downside limited?

Answering questions like these can help investors figure out if they want to take any action before or after earnings, depending on what happens to the stock.

In an attempt to bring color to these questions, let's look at Apple's valuation and analyze current catalysts driving the underlying business.

It's no secret that there is very little growth priced into Apple stock. In fact, trading at just 13 times earnings, it could be argued that Apple's underlying business is priced to simply maintain its current levels of profits over the long haul. Even the broader S&P 500 trades at a considerable premium to Apple at 18 times earnings. 

But is maintaining its bottom line really that easy? After all, Apple's 2013 net income of $37 billion was down from $41.7 billion in 2012. Is this the beginning of the decline of Apple's fundamentals?

Probably not. Without even considering potential catalysts for the company's business, three underlying financial trends point to slow growth going forward.

First, Apple's top line is still growing. The tech giant's 2013 revenue of $170.9 billion, for instance, exceeded the company's 2012 revenue by more than $10 billion. Second, Apple's narrowing gross profit margins seem to have stabilized at about 38%. Finally, Apple's pricing power appears to remain intact, with only nominal declines in the average selling price of the iPhone.

And looking out into the future, two macro trends look like they will serve as growth opportunities for Apple.

First, the smartphone and tablet markets are still growing robustly. In the U.S., for instance, the base of smartphone users grew 24% in 2013, according to ComScore. Tablet users grew by 57%.


iPhone 5s.

Going forward?

"The rapid evolution in mobile usage will only expand," said ComScore marketing insights analyst Adam Lella (via Mobile Marketer).

Second, Apple is just getting revved up in China with the world's largest carrier, China Mobile. With Apple only beginning to sell iPhones through the carrier in January, and the carrier's 4G network barely started, China Mobile's 776 million subscribers will likely serve as a market for steady meaningful growth over the next several years.

And if anyone doubts the iPhone's potential in China, they only need to glance at statistics from app analytics firm Umeng, which show that Apple has 80% market share of the 27% of smartphones in China priced at $500 or more.

Apple and Q2 earnings
A conservative valuation combined with meaningful catalysts for continued business growth make Apple stock look enticing. Even more, the risk profile looks so favorable that the stock could even be a buy before earnings.

Sure, neither of these reasons for buying Apple stock is new. In fact, both are somewhat boring. But no matter how uninteresting these reasons for buying Apple stock may be, both are difficult to refute.

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Daniel Sparks 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.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

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."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

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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