Apple (NASDAQ:AAPL) may be one of the largest companies on the planet, but it continues to be a battleground stock for tech investors. With the tech giant poised to report earnings on July 22, is the stock a buy, sell, or hold today? We asked three of our top tech analysts to reveal their thoughts on Apple before the company reveals its results.
A year ago, it was easy to call Apple a buy. In May 2013, I even called Apple "a dividend investor's dream stock
." But what about today? Up 54% in the past 12 months, is all the opportunity for the company priced in?
At the end of the day, here's how I see it. Free cash flow, the good stuff that levels the playing field for all businesses, is still coming robustly for Apple. In fact, about $0.26 of every dollar of Apple's sales ultimately ends up as free cash flow.
This free cash flow shouldn't be ignored. Sure, Apple may have limited ways it can use that cash to meaningfully grow its business, but cash can still be used to build shareholder value by repurchasing shares and paying out dividends, too. Even more, the cash itself can be used as a competitive strategic weapon. Consider how Apple financed GT Advanced Technologies, enabling the company to shift their entire business model to manufacturer sapphire crystal displays for upcoming Apple products.
What kind of premium has the market placed on Apple's free cash flow? Not much of a premium at all: 12.4. It's this conservative ratio, combined with no sign of headwinds for Apple's ability to produce this cash flow, that makes me think the stock is still a buy in my opinion -- even near all-time highs.
I certainly like Apple's prospects going into the fall. It may be a worn-out theme at this point, but I fully expect that the iPhone 6 will appeal to many Android buyers who may prefer iOS but prefer a larger screen. If Apple just releases a 4.7-inch phone, then this could still do the job well, but a tag team of a 4.7-inch and 5.5-inch could really hit the Android camp (and, in particular, Samsung) where it hurts. The only concern that I have is that these expectations may be nearly fully baked into the stock at this point.
However, something that I do think will continue to skew the risk/reward balance in favor of a long position is the gigantic buyback program that Apple has in place. Apple has what is effectively unlimited resources to buy on any meaningful dip or correction, and it has signaled that it plans to use them.
As far as I'm concerned, if Apple sees a large downward correction following its earnings report, then this would represent a compelling buying opportunity.
Evan Niu: Apple has come back in favor with investor sentiment in a big way over the past year. While it has long traded at a discount to the S&P 500, the valuation remains compelling given the momentum that it's regaining.
If we look at some of the reasons investors were so pessimistic about Apple, many of those have largely been addressed.
- Concerns about high-end smartphone saturation: This remains relatively true, but it appears that Apple is taking share from Samsung in the high end. At the same time, Apple's expected move to larger phones will further strengthen its position with premium smartphones. Meanwhile, Apple continues to expand mid-range offerings.
- Concerns about margin contraction: Gross margins briefly dipped below 37% last year. While most smartphone OEMs would love margins like that, Apple investors didn't like the downward trend. Apple posted surprisingly strong margins last quarter. Gross margin may see some downward pressure once the new iPhones are released, since redesigned products start at the height of their cost curves, but overall margins have definitely stabilized.
- Concerns about too much cash: Tim Cook has kept his word with Apple's aggressive capital return program, and focusing on repurchasing shares over dividends is more beneficial to shareholders in the long term. Issuing debt reduces overall cost of capital, while using that cash for repurchases delivers significant earnings accretion.
The iPhone's momentum on China Mobile will probably help carry iPhone sales through the summer, and then Apple will unleash a slew of new products in the fall. Street analysts are also turning bullish again, which will also amplify improving sentiment. Apple looks like an attractive buy right now.