It's official: Apple (AAPL 1.92%) is back, and flying high. After a relatively sluggish few months earlier this year, the introduction of its new iPhones and Apple's recently announced fiscal 2014 Q4 earnings lit a fire under its stock, which is now up over 30% year-to-date. With record revenues and the unmitigated success of Apple's new iPhones, what's not to love? With this in mind, Fool tech contributors present their bull and bear cases for Apple stock.
Andres Cardenal: My bullish case on Apple is based on three simple and powerful reasons.
Apple is a high-quality business benefiting from extraordinary competitive strengths. The company has a particularly loyal customer base, and consumers are willing to pay premium prices for Apple products versus those of the competition. Pricing power is a clear reflection of competitive differentiation, and it generates superior profitability for Apple. According to the Forbes Brand Ranking, Apple is the most valuable brand in the world because of this above-average profitability.
Besides, the company is delivering rock-solid financial performance and proving that it has what it takes to generate impressive growth rates for a business of its size. Apple announced a big increase of 16% in iPhone unit sales during the September quarter, while iPhone sale-through growth was even stronger, with a 26% increase.
According to CEO Tim Cook: "Demand for the new iPhones has been staggering and geographically broad-based markedly higher in every single country where we've launched compared to the iPhone 5s a year ago." So Apple seems to be reaching the crucial holiday quarter with strong sales momentum.
Apple has ventured into new categories such as smart watches and digital payments with Apple Watch and Apple Pay, respectively. It's far too early to tell if these new launches will move the needle much, however, it's good to see that Apple continues to be a dynamic and innovative company.
Last but not least, Apple is attractively valued for such as high-quality business delivering strong financial performance. Apple stock trades at a forward P/E ratio of 13.7, substantially below the forward P/E ratio of 17.1 for companies in the S&P 500 Index according to data from Morningstar.
Tim Brugger: First, the good news: as Apple CEO Tim Cook said, "Our fiscal 2014 was one for the record books, including the biggest iPhone launch ever with iPhone 6 and iPhone 6 Plus." Apple sold a whopping 39.3 million iPhones last quarter, so it's no wonder Cook was feeling giddy. And therein lies one of the concerns for Apple investors.
Apple sold a few Macs last quarter, and even some iPads, but an estimated 70% of its profits still comes from iPhone sales, which should have long-term investors feeling uneasy. No matter the industry or past performance, any company that derives such a significant portion of its revenues from one product line is at risk: period.
In addition to its lack of diversification, Apple also needs to address the overall lack of smartphone growth in mature markets. This year, smartphone sales in established markets are expected to grow a paltry 4.9%, according to IDC, compared to 32.4% in emerging markets. And by 2018, nearly 80% of smartphones on the planet will be owned by folks in emerging markets. The problem for Apple is that while folks in places like India love iPhones, they can't afford them, opting for low-cost alternatives from manufacturers like Samsung (NASDAQOTH: SSNLF).
Will Cook eventually change his tune and offer emerging market consumers an entry-level smartphone? Probably not, it's Apple. The, "we don't react to markets, we make them" mentality was fine when Apple actually did, but those days are gone. And how much longer can Apple continue putting all its eggs into one iPhone basket? Diversifying its product line-up and coming to terms with the reality of a changing market is necessary. If not, Apple fans better enjoy the ride now, because it won't last.