Apple (AAPL +1.16%) underperformed the S&P 500's 26% run in 2013, with the stock up roughly 5%. However, the company's product refresh late last year, coupled with its long-awaited deal with China Mobile (CHL +0.00%), has the potential to drive Apple shares to its previous all-time highs. Apple rebounded at the end of 2013, but at $530 Apple is still cheap compared to its underlying value and has one of the cheapest valuations among large-cap technology peers.
Gaining market share
Apple has a strong foothold in the U.S. and developed markets, and continues to increase its market share. The company's iPhone 5s has been well received by consumers and should enable the company to gain more ground in the enterprise space, due to more security features like the fingerprint sensor.
In the U.S., Apple's share of mobile OS at 41.2% of total smartphone users at the end of November, and phones running on Google's (GOOG 0.15%) Android platform took the lead position with 51.9%, according to comScore. Apple and Google are both adding more users in the U.S. at the expense of smaller players including BlackBerry and Microsoft.
The global smartphone market is expected to rapidly expand in the next few years, from roughly 1 billion units annually in 2013 to more than 1.7 billion in 2017. Both iOS and Android are well positioned to capitalize from the growth of smartphone adoption across the globe.
China Mobile will drive incremental sales
Apple's long awaited deal with China Mobile is a positive for the company, and should drive the company's iPhone unit sales in the gigantic Chinese market. China Mobile's massive customer base of more than 763 million customers will aid Apple's top line for the next few years.
Since Apple generates roughly 53% of its total revenue from the iPhone, the China Mobile deal would propel Apple sales in 2014 and beyond. Apple's iPhone 5s and 5c will hit China Mobile's massive retail network in a few days. And a growing middle-class population in China will ensure that the demand for the iPhone is pretty high.
China Mobile already has more than 181 million 3G subscribers, and is constructing the largest 4G network in the world. And faster Internet speeds will drive service sales from iTunes and the App Store. Sales from the App Store surged past $10 billion in 2013, and the China Mobile deal will almost certainly drive up revenues from software and services in 2014. In addition, demand for other Apple products, including the iPad and Mac, will increase as a trickle-down effect from a broader presence in China.
Earnings growth
Apple is still trading at a sizable discount to bigger tech names, and is a reasonably cheap stock. And if Apple accepts the proposal by activist investor, Carl Icahn, the company's EPS can increase dramatically.
Even if they reject Icahn's offer, they have a massive buyback program. Apple's diluted share count decreased to 909 million in the last quarter. With $37 billion of authorized funds for share repurchases left to be executed, this massive buyback will certainly increase Apple's EPS in the longer term. And since Apple's cash hoard is in excess of $146 billion, the company is almost certain to increase its share repurchase authorization after the current plan concludes.
Earnings forecasts for Apple's big holiday season are quite bullish. Sell-side analysts are modeling that Apple's EPS will be $14.07, which will be a year-over-year increase of earnings per share for the first time in five quarters.
Going Forward
Apple's earnings multiple should expand in 2014, based on its China Mobile deal and strong consumer adoption of the iPhone 5 line. Investors will get additional color on Apple's recent China Mobile deal and other product developments when the company reports earnings in a few weeks.
Apple's valuation multiples are significantly lower than other rapidly growing large-cap technology peers like Google and Amazon, and is being valued like a mature company like Microsoft. But Apple's innovation engine is more robust than Microsoft's, at a much smaller R&D budget as well. Lastly, the biggest share repurchase in history will certainly help the company's stock price propel to the $700 mark.
