The Aftermath of Apple's Earnings

What should shareholders do now that the dust has settled?

May 13, 2014 at 11:59PM

Monday was a big day for Apple shareholders because the stock closed above $600 for the first time since October 2012. For many years, Apple was a growth story. But now, unbelievably, it has become as much of a value story as anything else.

Daniel Sparks of the Motley Fool presented an excellent bull case for Apple in a recent article. Sparks writes:

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. 

Apple is priced as if its growth is not only over, but with a P/E ratio lower than that of the overall S&P 500, many investors seem to think that Apple's growth will actually swing negative sometime soon.

Numbers don't lie
Not only do I disagree with the premise that Apple will see negative revenue growth any time soon, iPhone and iPad sales in China via China Mobile (NYSE:CHL), China's largest carrier, will continue to provide positive revenue growth for Apple for years to come. In fact, take a look at a couple of graphs that have been updated since Apple's recent earnings report. The first chart shows Apple's quarterly revenue since 1999:

Apple Revenue

This chart actually shows that the slope in Apple's revenue growth may not be as steep as it has been in the past, but it is still positive on a year-over-year basis. Apple's annual revenue for 2013 grew by 9.2%. While that growth rate is far from the whopping 44.6% growth rate Apple enjoyed in 2012, it's certainly not negative.

Reaching the saturation point?
Another misconception about Apple is that the iPhone market is saturated. However, the following graph tells a different story:

Global Apple Iphone Sales Since

Again, Apple's iPhone sales growth rate slowed from 72.9% in 2012 to 20.2% in 2013 on a year-over-year basis. But, the idea that there is somehow less demand for iPhones now than in years past is false. The iPhone launch with China Mobile just took place in early 2014, and China Mobile has more than three times the number of subscribers at Verizon and AT&T combined. These numbers indicate that revenue growth from China will likely be far more important to Apple's future than its continued growth in the U.S.

The company we keep
Somehow, when Apple's annual revenue growth rates were upward of 40%, investors seemed to lump the stock in with other growth stocks like Amazon and Netflix, which traded at ridiculously high multiples (Amazon still trades at a P/E ratio of around 500, for example). However, Apple generated such massive profits that, even when its share price was peaking around $680 in 2012, it's P/E ratio stayed in the mid-to-upper teens.

Apple was never simply a growth stock deserving of punishment by the market as soon as its growth started to slow. Apple was, and still is, a value play with the potential for continued staggering growth for years to come.

The future is bright for Apple shareholders
The list of reasons to own Apple after the recent earnings beat doesn't stop with the low P/E ratio and growth potential in China. With the company pledging a 30% increase in buybacks, a 7:1 stock split, and an 8% dividend hike, Apple shareholders are well-positioned moving forward in this bull market.

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Wayne Duggan is the author of Beating Wall Street with Common Sense and the developer of tradingcommonsense.com. Wayne Duggan 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.

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