Apple's Comeback Is Likely to Continue

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

Investor sentiment in technology can change quickly. Apple (NASDAQ: AAPL) had previously fallen out of favor on Wall Street with the uncertainty of what its next great product would be and worries about a shrinking gross margin. However, the recent dividend boost and share buyback program has shifted the negative sentiment to the positive side.

Here's a glance at Apple's net sales for Q2:

<table> <thead> <tr><th> <p>Product</p> </th><th> <p>Change in Net Sales y-o-y</p> </th><th> <p>% of Total Net Sales</p> </th><th> <p>Q2 Net Sales</p> </th></tr> </thead> <tbody> <tr> <td> <p>iPhone</p> </td> <td> <p>+ 3%</p> </td> <td> <p>53%</p> </td> <td> <p>$22.9 billion</p> </td> </tr> <tr> <td> <p>iPad</p> </td> <td> <p>+ 39.6%</p> </td> <td> <p>20%</p> </td> <td> <p>$8.7 billion</p> </td> </tr> <tr> <td> <p>Mac</p> </td> <td> <p>+ 7.4%</p> </td> <td> <p>12.5%</p> </td> <td> <p>$5.4 billion</p> </td> </tr> <tr> <td> <p>iPod</p> </td> <td> <p>- 20.3%</p> </td> <td> <p>2.2%</p> </td> <td> <p>$962 million</p> </td> </tr> <tr> <td> <p>iTunes, Software, Services</p> </td> <td> <p>+ 29.7%</p> </td> <td> <p>9.4%</p> </td> <td> <p>$4.1 billion</p> </td> </tr> <tr> <td> <p>Accessories</p> </td> <td> <p>+ 15.4%</p> </td> <td> <p>3.2%</p> </td> <td> <p>$1.4 billion</p> </td> </tr> </tbody> </table>

There is positive growth in each product category except for iPods. It is interesting to note that the less thought of iTunes, software, services, and Accessories categories are growing, and together comprise 12.6% of net sales. That is now higher than the net sales of the Mac.

Apple is clearly undervalued in relation to the market and in relation to its competitors. This undervaluation is evident with a trailing P/E ratio of 10.63, a forward P/E ratio of 10.05, a PEG of 0.50, and a price to book ratio of 3.54. The SPDR S&P 500 (NYSEMKT: SPY) has a trailing P/E ratio of 14 and a forward P/E of 14.4. The S&P 500 currently looks overbought which may lead to some consolidation in the form of a downward correction or even sideways price action.

The market doesn't run-up in a straight line for too long without pullbacks along the way. I think Apple could outperform the market in the near-term as its valuation remains below the market and as sentiment has shifted to the positive side for the company. 

Google (NASDAQ: GOOG) is now valued higher than the market, and much higher than Apple with a trailing P/E ratio of 24.8, and a forward P/E of 15.5. This premium valuation could cause Google's stock to correct or pause a bit in the form of downward or sideways price action. Google is expected to grow earnings at about 15% per year for the next five years. This is lower than Apple's expected earnings and Google does not reward shareholders with a dividend.

Samsung (NASDAQOTH: SSNLF) is also valued higher than Apple with a trailing P/E ratio of 12.9 and a forward P/E of 12.3. Samsung is eating into Apple's market share with its less expensive smartphone offerings. However, Apple still maintains a loyal following with its perceived device & software quality and user-friendly ecosystem. Samsung has its place in the market as the price-conscience choice, while Apple maintains its status as the premium brand. 

Apple was in need of some strong catalysts to get the stock back in vogue on Wall Street. It looks like we are starting to see some of these catalysts already. The dividend was just recently increased by 15%. The stock repurchase plan was increased from $10 billion to $60 billion, of which $1.95 billion was used in the first three months of the year. The share repurchase program is expected to be completed by December 2015. These are two positive catalysts that make Apple attractive as an investment. I think that Apple's plan to return money to shareholders has caused the stock to bottom out and reverse course.

There are a few likely business catalysts that could help the stock recover further. One of them is getting the iPhone carried by China Mobile, the world’s largest cellular operator with 710 million subscribers. This would help generate significantly more revenue for Apple. Another possible catalyst includes upgraded versions of existing products that could create excitement for consumers. Current Apple customers are loyal and some of them insist on having the latest model. Of course, there is the possibility of a new product category being introduced. There have been rumors of an actual Apple television and a wristwatch, but this remains to be seen.

I like to take an objective view and look at where the company currently stands and where it is going. We already know that by standard measures, Apple is undervalued. Therefore, the stock is positioned at a nice starting point. Apple is expected to grow earnings annually at about 21% for the next five years. If these expectations are met, the stock could double the market’s performance over the next five years.

I think that it is likely that Apple will find a way to get China mobile as a carrier, giving the company access to many more customers. Although the gross margin has shrunk and may continue to shrink with lower-priced products, I think that ultimately, earnings growth will be the bigger catalyst in the long-term to allow the stock to climb higher. 


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David Zanoni owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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