Apple’s Stock Price Can Take off after September

By Gayatri Sharma - August 10, 2012 | Tickers: AMZN, AAPL, CRUS, GOOG | 0 Comments

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Apple Inc. (NASDAQ: AAPL) is in a consolidation mode since April 2012. I believe that Apple still has some headwinds in the near term and may trade range bound till its September results due to the following reasons:

• The aging of the current 4S product cycle
• Customers waiting in anticipation of the iPhone 5, which is expected to be launched at some point in October
• A q/q slowdown in new iPad sales, as consumers expect an iPad mini in near future.

However, I see significant growth catalysts post-September which can help its stock price for the rest of the year. Cirrus Logic (NASDAQ: CRUS), a supplier of an audio codec for the iPhone and iPad product lines, indicated that it expected its September quarter revenue to grow 70% sequentially from June and expected another sequential growth quarter in December. I believe that this indicates the scale of upcoming production and growth for Apple in the coming quarters. The main catalysts for Apple in the coming months are:

1. Launch of iPhone 5: Each new generation of iPhone sold approximately equal to all previous generations combined. According to Asymco analyst Horace Dediu, iPhone 3G sold four times as many units as the original smartphone, and the iPhone 3GS outsold both the 3G plus the original by 1.6 times. The iPhone 4 sold more than all of its predecessors, and the 4S is reaching the half way mark of surpassing the first four models in sales. I believe that iPhone 5 can continue this trend and iPhone 5 sales can break the previous sales record over its lifetime.
2. Upcoming Buyback: Apple stated that it would initiate a buyback plan beginning in the company’s fiscal 2013, which starts September 30, 2012. The buyback for $10 billion is expected to be executed over three years, primarily to neutralize the impact of dilution from future employee equity grants and employee stock purchase programs.
3. Chinese Growth Prospects: With the US smartphone markets almost saturated, the robust growth in China and other emerging markets will help offset some of the investor concerns about Apple’s growth. China currently accounts for 20 percent of Apple’s total sales, making it the new boom market for Apple. Apple is likely to see sales growth nearly double in greater China this year. Furthermore, next quarter will be the first quarter to include China sales of new iPads, which could generate incremental revenues for Apple.
4. iPad mini will increase addressable market: Demand remains strong for the iPad in consumer, education, government and enterprise markets. iPad revenue totaled $9.2 billion in Q2, a y/y increase of 52%. iPad unit sales totaled 17 million, an 84% increase y/y. iPads represented ~26% of total revenue, its largest percentage to date. Additionally, If the rumor of iPad mini release in the second half of 2012 materializes, it can increase the total addressable market to compete with Amazon’s Kindle Fire and Google’s (NASDAQ: GOOG) Nexus 7. 

Apart from near term catalysts like new product launches, the other growth drivers like expanding stores, online/carrier distribution in China and increasing demand for tablets make Apple a good buy.

I believe that the company can generate high revenues with its iPhone launch which is said to be the biggest launch in the history of consumer electronics. With iPad sales not slowing down and the expected release of iPad mini, Apple looks to maintain its stronghold in the tablet market. Apple Inc is currently trading at a forward P/E of 11.81, which is at a discount to Google’s 13.  As the company is well poised to continue its market share gains from Nokia, HTC and RIM, I expect its discount to its other mega cap peers is unwarranted and recommend it as a buy.

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