Apple Inc. Stock Hits $100: Here's What's Different This Time Around And Why You Can Still Buy

Apple approaches its all-time high as the iPhone 6 is expected to be unveiled in a matter of weeks. This all sounds eerily familiar, but things are different this time.

Aug 19, 2014 at 5:30PM


Source: Apple.

Apple (NASDAQ:AAPL) shares are approaching their all-time high as the company prepares to release its latest and greatest iPhone in what will very likely be a record launch. This situation might be giving many Apple investors a sinking feeling of deja vu.

Almost two years ago, Apple stock was on the same trajectory ahead of the launch of the iPhone 5. Shares peaked at about $705 (pre-split) on the Friday in September 2012 that the new device went on sale. The following Monday, when Apple reported that it had sold 5 million units, marked the beginning of a 45% pullback over the following seven months.

Shares have now hit $100 (the equivalent of $700 pre-split) for the first time in almost two years. The good news is that a lot has changed over that time, and it's not too late to buy this stock.

It's not such a tough margin comparison anymore
It's no secret that Wall Street can be fickle and shortsighted at times, which can happen when you construct discounted cash flow models based on forecasting estimates in perpetuity (as in, forever) to arrive at a 12-month price target. I don't know about you, but I'm generally not good at forecasting until the end of time, so I don't even try.

On top of that, two years ago Apple faced an extremely tough comparison, as most metrics are typically compared on a year-over-year basis. Apple was coming off a long string of increasingly profitable quarters. So profitable, in fact, that the figures simply weren't sustainable. No consumer electronics company with meaningful hardware operations should be able to sustain a gross margin approaching 50%, but Apple got pretty close.

Aapl Gm

Source: SEC filings. Calendar quarters shown.

Investors like to look at trends, and in that sense Apple's gross margin was heading the wrong way. That's not to say the gross margin was bad by any means, just less juicy. Still, it was enough to rattle investors. Here's how things have changed since then.

Aapl Gm

Source: SEC filings. Calendar quarters shown.

Gross margin has largely stabilized and is now climbing higher once again. Apple took some margin hits in revamping its warranty policies in China and giving more software away for free, among other moves. While its gross margin may never reach 47% again, the worst appears to be behind the company. Longer term, Apple has posted an average quarterly gross margin of 38.6% since the beginning of 2007, a level that all of its hardware rivals would kill for.

Apple's gross margin now has some notable tailwinds as we head into the fall product cycle. The company expects commodity prices to remain favorable; it will gain operating leverage as revenue ramps up seasonally; the iWatch could help overall profitability; and the iPhone 6 could even see a price increase to capture value from demand for larger displays.

Speaking of the iPhone 6...
Another possible reason why the iPhone 5 ended disappointed investors was that the increase to a 4-inch display could have been perceived as a stopgap solution to shifting consumer preferences. In 2012, Google Android devices were already approaching 5-inch displays, such as Samsung's 4.8-inch Galaxy S III. Moving the iPhone display from 3.5 inches to 4 inches might have appeared insufficient, even as Apple played the "one-handed use" angle fairly successfully.

Quite frankly, there's probably not much I can say about the iPhone 6 specifications that you aren't already familiar with, thanks to Apple's active rumor mill and leaky supply chain. I'll just remind investors that the move to larger displays will substantially broaden Apple's addressable market in key regions such as China, while simultaneously triggering a massive upgrade cycle within the tech giant's current user base for those itching for a bigger iPhone.

Apple's repurchase program by any other name would be just as accretive
Easily the most financially significant difference between now and 2012 is Apple's massive capital return program, which didn't start out nearly as massive. Apple announced the program six months before the iPhone 5 launch, and the first dividend was paid during the same quarter.

So when the company's pullback started in September 2012, investors were under the impression that Apple planned to return $45 billion to them over the following three years, via $10 billion in share repurchases and $35 billion in dividends. What they didn't know is that Apple would soon nearly triple that total to $130 billion. The vast majority of those increases have been dedicated to share repurchases, and investors also couldn't have fully appreciated how accretive these buybacks would be since they hadn't begun yet.

There are two common criticisms of share repurchase programs. On average, companies have a poor track record with timing repurchase activity, and buybacks sometimes merely offset stock-based compensation while failing to actually reduce outstanding shares. On both counts, Apple's repurchase program has been a success.

Supplementing open market purchases, Apple has selectively used accelerated share repurchases to take advantage of slumping stock prices. Of course, this is all in hindsight; if shares drop again, the timing won't look so favorable.

Aapl Repurchase Vs Price

Source: SEC filings and Wolfram Alpha. ASR = accelerated share repurchases. Calendar quarters shown.

Shares outstanding have undeniably decreased in a big way since the program started. The net result is significant earnings accretion as Apple's net profits are split among fewer shareholders.

Aapl Outstanding

Source: SEC filings. Calendar quarters shown.

Most of Apple's growth in earnings per share is being driven by these buybacks. While some will call this "financial engineering," whatever you call it, buybacks deliver an undeniable benefit to individual shareholders. Semantics aside, that's what matters at the end of the day.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). 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." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

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.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information