Here's What Will Drive Apple Inc's Stock Higher

Apple (NASDAQ: AAPL  ) earnings surprised to the upside, and the company's stock price rallied after it disclosed its outsized capital-returns plan. The company's financial position remains robust, and coupled with the stock split, it should drive Apple shares higher.

Strong numbers
In the last quarter, Apple's revenue increased 5%, year over year, to $45.7 billion. The company's gross margin grew ahead of management's guidance and stood at 39.3% for the quarter. Apple's ability to preserve its high margins is great for the company's bottom line. 

Apple's EPS increased 15%, year over year, to $11.62, partially driven by the $23 billion share-repurchase Apple conducted in the first six months of fiscal 2014. Apple still has $134 of net cash in its balance sheet. Apple's operating cash flow for the quarter stood at a healthy $13.5 billion.

The company's deal with China Mobile (NYSE: CHL  ) has shown signs of growth, as international sales made up 66% of the company's revenue, while China made up 20% of total revenue in the last quarter. 

Stock split and capital returns
Apple hiked its capital-returns program substantially by ramping up its share-repurchase program by an additional $30 billion. The company also hiked its dividend by 8%, and now the quarterly payout for common shares would stand at $3.29 per share. Apple now intends to increase its dividend every year, which should attract more dividend-oriented investors. 

The company will be adding more debt to its capital structure, as it stated that it will be raising debt in the U.S. and abroad to fund its enhanced capital-returns program for shareholders. More than 88% of the company's total cash is overseas, and the company will tap into the debt-equity markets to avoid repatriation of that cash and prevent tax payments. In addition, Apple has finally decided to split its stock 7-1, and this split into smaller pieces has the potential to drive incremental upside for the company's shareholders. 

Apple's stock split follows in the footsteps of leading technology competitor Google, which split its stock into two, providing Google's founders more voting control.

Robust iPhone sales, but iPads are losing ground
In the last quarter, Apple sold 43.7 million iPhones, while revenue growth from iPhone sales stood at 14%. However, the company's average selling price, or ASP, for iPhones fell by $41 from the holiday quarter to $596. The addition of the largest carrier in the world, China Mobile, has likely played a major part in driving up unit sales, but at a lower price. Apple cited strong sales of the iPhone 4s as a reason for the decline in unit price, and that should move upwards as more consumers buy the higher-end iPhones. 

China Mobile finished off the March quarter with more than 781 million customers, and as it upgrades its network and makes a full-fledged rollout of the 4G network, Apple's addressable market in China will increase substantially due to this relationship. 

Apple's management disclosed that the company hit a new all-time record for total iPhone sales in the BRIC countries, or Brazil, Russia, India, and China. In addition, Apple's market share in Japan jumped to 55% in smartphones. So the company is making in-roads in major economies across the globe.

CEO Tim Cook stated that the he anticipates the tablet market to surpass the PC market in size in the near future, but the company's iPad sales saw a material decline in the last quarter. Apple sold 16.4 million iPad units at an ASP of $465. Apple's iPad revenue declined 13%, year over year, to $7.6 billion, sparking some concerns among analysts and investors. 

In addition, Apple intends to broaden its retail footprint substantially in the next few years. With new retail stores in Brazil and Turkey, the company's presence is now in 15 countries. In addition, Apple plans to triple the number of retail stores over the next two years. 

The bottom line
Apple anticipates revenue of $36 billion-$38 billion in the next quarter, and a gross margin of 37%-38%. Apple's revenue guidance suggests mid-single-digit revenue growth. So growth for the company has not vanished completely. 

The company acquired 24 companies -- mostly small ones -- in the past 18 months, and this should aid the innovation engine at Apple. Apple's iTunes business continues to grow in the double digits, and now has almost 800 million accounts on iTunes. In addition, the company can build on this to possibly develop a payments business in the future.

After the expansion of the share-repurchase program, the company still has $44 billion remaining in buyback authorization until Dec 2015, and this should aid the company's EPS growth. 

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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 April 29, 2014, at 12:26 PM, jaticker wrote:

    "Apple plans to triple the number of retail stores over the next two years".

    Are you sure of that statement ?

    Seems like a hard project to find good locations.

  • Report this Comment On April 29, 2014, at 12:40 PM, twolf2919 wrote:

    The title is "Here's What Will Drive Apple Stock Higher" - but then the author simply regurgitates what was revealed at the earnings announcement a week ago...the reason the stock has risen thus far.

    But nowhere does he reveal why it should go even higher! What a misleading title! Click bait, I guess!

    The author also doesn't seem to have good listening skills: at the Q/A session that followed the earnings call, the "tripling of retail stores" was clearly in reference to China! In other words, contrary to the author's statement, Apple does NOT intend to triple its retail stores overall - it intends to triple the number of stores in China!

  • Report this Comment On April 29, 2014, at 1:43 PM, artlaz wrote:

    The tripling of retails stores refers to greater China. Hard to disagree with twolf2919.

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9/3/2015 3:28 PM
AAPL $110.69 Down -1.65 -1.46%
Apple CAPS Rating: ****
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