Source: Apple.
Apple (AAPL 0.51%) stock is attracting a lot of attention lately, as Wall Street analysts and media outlets are eagerly trying to figure out how recently launched devices such as the iPhone 6 and Apple Watch will resonate among consumers over the coming months. Although it's important to monitor demand for Apple's new products, the best investment decisions are usually made when investors focus on the key long-term drivers of business success.
Looking at the qualities of a blue chip stock such as reputation for quality, reliability, and the ability to operate profitably in good times and bad, Apple could easily be on its way to becoming the next blue chip stock.
A high-quality business
Apple isn't the biggest player when it comes to market share in smartphones. Especially in emerging markets, where cost considerations are a big factor for consumers and the carrier subsidy model is not as widespread as it is in the U.S., Samsung and other manufacturers using the Android operating system account for a bigger piece of the pie.
However, that´s not necessarily a problem for Apple, the company is all about quality and competitive differentiation as opposed to unit sales or market share. Importantly, this strategy means that Apple gets to charge higher prices and generate better profitability than the competition. While Samsung sells more devices, Apple makes far more money on each device, Apple's operating margin is around 27% of sales for the June quarter, almost double Samsung´s operating margin of 14% during the same period.
Apple is the top company in the J.D. Power customer satisfaction study, both in smartphones and tablets. In the latest earnings conference call, CEO Tim Cook quoted reports from ChangeWave saying that the customer satisfaction rate is at a sky-high 97% for iPhone users and 98% for iPad Air users, while users of an iPad Mini with Retina display reported a truly extraordinary customer satisfaction rate of 100%.
Source: Apple.
Based on data from the Forbes World's Most Valuable Brands Ranking, Apple is the most valuable brand in the world. The ranking considers profitability as a key factor. According to Forbes, "the most valuable brands are ones that generate massive earnings in industries where branding plays a major role," so a powerful brand has very clear and direct implications for investors.
Apple needs to permanently innovate to sustain growth, and this always carries some risks. However, the company has a remarkably loyal customer base, and its deep ecosystem of software and applications is particularly valuable when it comes to cementing its relationship with customers. Sales growth may fluctuate from quarter to quarter, but chances are both sales and earnings will continue moving in the right direction over the long term.
Growing iCash flows
One of the most important characteristics of a blue chip stock is unwavering financial strength, and Apple is doing remarkably well in that department. The company has a rock-solid balance sheet, with more than $164.7 billion in cash plus marketable securities, versus only $31 billion in long-term debt and commercial paper liabilities.
This means Apple has a massive net cash position of $133.7 billion. To put these numbers in perspective, Netflix has a market cap of roughly $27.6 billion, while Twitter is worth around $30.9 billion at current prices. The possibilities are certainly exciting if Apple decided to go shopping for growth opportunities with its enormous financial resources.
Apple reinstated dividends in 2012, and it has materially increased payments from $0.38 to $0.47 per share since then. In addition, the company has implemented a gigantic share-buyback program, Apple has already taken action on $74 billion of its $130 billion capital return program.
Source: Apple.
Apple produced nearly $46.5 billion in operating cash flows through the last three quarters, while capital expenditures absorbed only $5.7 billion and dividends required $8.3 billion during that period. This means the company generates more than enough cash flows to sustain both reinvestment needs and cash distributions to investors.
The company has recently announced that it received preorders for more than 4 million units of its new iPhone 6 and iPhone 6 Plus models in the first 24 hours. That's a huge number, and also double the approximately 2 million units in preorders it received in the first 24 hours after launching the iPhone 5 in 2012.
It will take a while until we can get a clear picture about demand for new products and services like Apple Watch and Apple Pay. But these recent launches show that Apple is actively innovating and setting industry standards, and that's quite important when evaluating the company's culture and potential for growth.
Key takeaway
Let's forget about short-term earnings and sales forecasts for a while. Apple seems to be firmly on its way to consolidating its position as one of the best blue chip stocks in the market thanks to its remarkable competitive differentiation and rock-solid financial performance. This should generate considerable gains for investors in Apple stock for years to come.
