Shares of Apple (AAPL -0.76%) have been range-bound for a while, as investors have been skeptical about the company's future growth prospects after weak guidance for the current quarter. Apple's deal with China Mobile (CHL) will start showing up in the company's financials, which should surprise to the upside.
Apple's revenue guidance of $42 billion-$44 billion implies flat year-over-year revenue. Investors weren't overly happy about the lack of growth in Apple's top line. The company did see a 6% increase in iPhone revenue in the last quarter, and its all-important gross margin stood at 37.9%. Going forward, the company's relationship with China Mobile should aid in driving big unit sales.
China Mobile sold 1 million iPhones in the month of February, after it commenced iPhone sales in January. And this momentum should continue as China Mobile grows its 4G network across the country. China Mobile was selling initially in only 16 cities, but over time is expected to launch iPhones in 340 cities. Apple's China deal should lead to revenue growth for the iPhone maker for years to come.
Moving forward, other Apple products, including the iPad and Mac computers, should get a boost in sales, too, as Apple grows its retail presence in China. In fact, Apple's management disclosed that in the last quarter, iPad sales in Mainland China doubled. That is a very positive sign for the company and should aid in growing its software and services business as well.
Betting on Apple
Apple ended the December quarter with $32 billion yet to be executed in its stock-repurchase program. But after the company's notable drop in stock price after last quarterly earnings, Tim Cook stated that Apple was opportunistic and aggressively bought back $14 billion worth of stock in the two weeks after earnings. The company bought $2 billion in the open market, and $14 billion through an accelerated share-repurchase program, which might take a while to be fully executed. In the last 12 months, Apple bought back more than $40 billion worth of stock, which is a record, according to The Wall Street Journal.
It is evident that the company is wagering big time on its long-term future. Apple's CEO believes that the company is still in growth mode, and he made the aggressive share repurchases because he believes that the company's future products will drive value.
The buybacks will aid earnings-per-share growth. In the last quarter, Apple's EPS grew 5% and there is room for higher EPS growth, which in turn, should drive higher upside for the stock.
What's on the way?
Investors want to see newer products from Apple, and not just heavy share repurchases alone. The company is being tight-lipped about its future product pipeline, and speculations about future Apple products have been all over the place -- from wearable devices to a mobile payment platform to a television set, and more. Recently, UBS stated that it expects Apple to launch an iPhone 6 in the latter part of the year. Based on the supply chain checks conducted by the analyst Steve Milunovich, they are anticipating a larger screen iPhone. New product launches should pave the way for a higher stock price for Apple.
The bottom line
Apple merits a greater valuation premium than it now commands. Investors' increasing confidence in management's ability to drive innovation in its future products should help on that front. The company buying back large amounts of stock demonstrates management's confidence in its business. And more carrier deals like China Mobile will lead to multi-year revenue and earnings streams for Apple.