Time to get into Apple?
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Apple Inc. (NASDAQ: AAPL)
After Apple's "devastating" Q3, shares are down 6% and Wall Street is crying. But was Apple's Q3 really all that bad? Now Apple's CFO Peter Oppenheimer did say, "we're reading the same speculation about a new iPhone as you are, and we think this has caused some delay in purchasing," meaning that because of iPhone 5 rumors, which might come out this fall, consumers held back from buying the phone. iPhone sales came in at 26 million, less than the 28 million expected, but its iPad sales were up 84% to 17 million. Earnings were up 20.5% year over year, and revenue growth was at 23%.
Apple compared to Google
20.5% earnings growth is nothing to laugh at, especially when this is considered a "bad" quarter for Apple. Now, Apple currently trades at a PE of 13.9, but you have to consider the fact that it has $117.2 billion in cash. Subtract that cash, and the PE becomes even lower with a PE of 11.5. Most companies with double digit earnings growth would be trading at a higher PE. Apple is expected to post a 22% EPS growth over the next 3 to 5 years, while Google Inc (NASDAQ: GOOG) is expected to grow at 16% over the same period, yet Google trades at a PE of 18.25. Now, Google does have $43.12 billion cash on hand, so minus that and you get a PE of 14.3. So, when matching up these two companies at the same PE ratios, Apple still has room to run even after the "bad" quarter.
Moving Forward
Now, if you were a shareholder prior to the earnings announcement, do not sweat. Short-term gyrations mean nothing in the long term. You still have plenty to look forward to. For instance, Apple is going to pay out its first dividend ever on Aug. 16. It will pay out $2.65 a share. Also, it will probably release the next iPhone this fall. There is a lot of anticipation in the air for this new device. This is from the LA Times: "the survey shows 14% of all consumers are saying they are "very likely" to get the next iPhone while 17% say they are "somewhat likely." The numbers are higher than last year when 10% of consumers said they were "very likely" and only 11.5% said they were "somewhat likely" to get the iPhone 4S.
And on the other end of the spectrum, the numbers have also improved for Apple with fewer people saying they are "unlikely" to get their next phone." And from Apple's own Tim Cook, "I'm glad that people want the next thing, I am super happy about it. I am not going to put energy into getting people to stop speculating, that's not going to amount to anything." Both consumers and Apple's management seem excited for the possible upcoming release, which is a very bullish sign. Plus MAC sales were up while overall PC sales were down, and the iPad had a 84% increase in sales.
The iPad
iPad sales clocked in at 17 million this quarter, way ahead of expectations. Morgan Stanley expects the tablet market to grow by 91.7% in 2012, then 66.2% in 2013. Also, NPD DisplaySearch says that "when breaking down the numbers tablets will increase from 121 mobile units in 2012 to 416 mobile units by 2017." If they are correct, that would be a 344% growth over 5 years. Now, if Apple continues to command around 75% of all tablet sales, that would mean Apple is going to sell 312 million iPads in 2017. That is a growth story right there, and that is why I think Apple should be trading at a higher PE multiple.
Competition
One thing you have to keep in mind is the cut throat competition in the smartphone sector. From Microsoft (NASDAQ: MSFT) and Nokia's (NYSE: NOK) Lumia 900 phone and Windows 8 release to Samsung Electronics' (005930:Korea SE) Galaxy S3, everyone wants a piece of the pie. While Samsung and Google do remain serious competitors to Apple, it is too early to tell if Microsoft and Nokia will make a dent in this sector. The Lumia 900 is now being offered at $19.99 at Amazon and AT&T, an 80% discount to its original price of $99.99 when it was first released. Now this can be taken in several ways, but it is never really good news when you keep slashing prices to stimulate sales. Microsoft's Surface tablet is also on its way, but it is too hard to tell if that will be a big hit or a pathetic fail. As far as Samsung goes, it has sold over 10 million Galaxy S3 phones in the 2 months it has been out, but a recent study has shown that "Samsung's Galaxy S3 only got a 2 percent "very likely" nod from users who intend on purchasing a smartphone in the next 90 days," meaning that most of the hype around the Galaxy S3 has died down. The Galaxy S3 is powered by the Android OS from Google. Google's Android OS continues to be the primary competitor with the iPhone as 1 million new Androids are activated each day.
Final Thoughts
Apple is currently the most talked about stock and will be for some time as its stock continues to chug on upwards. While Apple's stock will fluctuate back and forth while investors and traders wait for the next iPhone release, in the long run it is a great buy. This is a growth stock trading at blue chip multiples. Because of this, I am very bullish on Apple and I think it should trade at higher multiples. Plus, now that it pays a dividend, income investors may also become interested in this company. Happy investing.
callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Microsoft, and Nokia. 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. If you have questions about this post or the Fool’s blog network, click here for information.
