Can Apple Break $700 on New China Mobile Deal?

Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I must admit, I was beginning to think that Apple's (NASDAQ: AAPL) insane run-up over the past few years might be coming to an end. After reading the latest earnings report, however, I can see how there's still room for the stock to go a bit higher, even after its latest surge. There are a number of reasons why this earnings report is being looked upon so favorably. Wall Street analysts were expecting Apple to sell around 30 million iPhones during the fiscal second quarter, but the company actually managed to sell 35.1 million. That led Apple's profit to nearly double on a year-over-year basis, and earnings per share were $2.26 higher than analysts were estimating. Revenue was 6.5% better than analyst forecasts as well.

Apple's big beat was primarily caused by terrific international sales, particularly in China. Most importantly, Apple has secured lucrative deals with China Telecom and China Unicom, and it should not be long before a deal with China Mobile (NYSE: CHL) is finalized. Considering China Mobile is the world's largest mobile telecommunications company by subscribers, this figures to be yet another huge boost for Apple. In my opinion, Apple's stock price, even after the surge that occurred on April 25th, still is not properly taking into account the power of China as a source of revenue. Investors can profit by buying Apple stock now and then reaping the benefits as Apple's China plan further develops.

On the other hand, I won't be the one to say that Apple's stock is going over $700 any time soon. The earnings report was great, but I do still have some concerns. For instance, Apple only sold 11.8 million iPads, which was over a million less than analysts were expecting. I think enthusiasm over the iPad could be fading, which would certainly be unfortunate for the company. There also remain questions about the iPhone's competitiveness in the U.S. After all, competition from the other smartphone makers is only getting stronger, and the subsidies that providers have to pay for Apple's iPhones are staggering. Apple contends that iPhone users are less likely to change their phone service, which is what makes the subsidies worth it for carriers like AT&T and Verizon, but I'm not so sure.

Regardless, Apple's statistics are still very appealing. Apple has much higher price to earnings (14.87), price to book (6.80), and price to sales (4.83) ratios than similar companies like Hewlett-Packard (NYSE: HPQ) and Dell (NASDAQ: DELL), but I don't see any problem with that. Hewlett-Packard and Dell recently took a hit in PC market share, while Apple's share increased. Fourth quarter 2011 results showed Apple sold 15.43 million iPads, while HP sold 14.7 million PCs. As tablets are becoming more popular, it will be tougher for PC makers like Hewlett-Packard and Dell to keep up with Apple. The story was similar for Dell, as it saw a 4.5% drop in PC growth for the same quarter. Dell shipped approximately 4 million units for a total market share of 22.4%. With terrific products like the iPhone and iPad as well as decent products such as the company's computer lineup, it's not hard to see why Apple's ratios are taking into account significant growth potential. In fact, another sign of that growth potential can be found in Apple's margins. Hardware has historically been a low-margin business, but Apple is different because of how much people will (over)pay for the company's brand name. With that in mind, net profit margin of 23.95%, gross margin of 40.48%, EBITD margin of 32.87%, and operating margin of 31.22% all look terrific, especially compared to the numbers that Dell and Hewlett-Packard are putting up.

Back to the earnings report, I think it's also worth discussing some of the questions that Apple's executives addressed during the press conference. For instance, one question was about the status of Apple's Mac business, which of course does not get nearly as much attention as its iPhone and iPad lines. I have a feeling a lot of people are undervaluing the Mac business, and I'm impressed with the results. As CEO Timothy Cook discussed, Apple's Mac business increased by 7% compared to the overall personal computer market, which increased at 2%. Additionally, while some concerns were expressed about Apple's Mac growth rate slowing, I don't view this is a significant problem because it's a reflection of the market overall. In fact, if Apple's Mac growth rate slows a bit due to iPad sales, that's not necessarily a bad thing.

CEO Timothy Cook also had a great answer to a question about devices converging, referring to the possibility that the ultra-light notebook and tablet products could eventually be combined into one. CEO Cook did not seem too enthusiastic about that idea (at least as it pertains to the Macbook Air), nor am I. In my opinion, Apple will benefit the most when its products are simple but elegant, and this appears to be what makes the iPad so appealing despite an otherwise ordinary set of features. Not only that, but the iPad is actually Apple's most successful product by an interesting metric that CEO Cook brought up. Apple has been able to sell 67 million iPads in 2 years, compared to taking 24 years to sell that number of Macs, 5 years for that number of iPods, and 3 years for that number of iPhones.

Clearly, Apple has been an enormously successful company, which is one reason why the company is sitting on nearly $30 billion of cash and short-term investments. With that much money, Apple almost did not have a choice but to start offering dividends. That's a move I like because obviously Apple has enormous growth potential, but it does not necessarily require the company to expend a ton of cash. The dividend will start on July 1st at $2.65 per share, which could make the stock a bit more attractive to retirees, although I do admit that's not much for a stock trading at over $600 per share. Regardless, I also think there's some price appreciation to be found in Apple's stock. Apple's price to earnings ratio was under 15 at the time of this writing, and that seems awfully low for a company with this much international growth potential.


BobbyFisher has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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