Apple started off the New Year with a roar as the company’s stock price rose from $400 in January to $600+ in a only a few months. The stock had a recent correction and fell to $570 only to jump past $600 following their blowout quarter in earnings on April 24th.
A brief recap of these earnings can be summed up by saying that the company tramped over analyst’s expectations by a huge margin which helped fuel buying and raised the stock by more than $40 in trading the following day. Apple posted quarterly revenues of $39.2B and a quarterly net profit of $11.6B or $12.30 earnings per share compared with analyst expectations of $10.06 per share on revenues of $36.8B. Earnings a year ago reported revenues of $24.7B and a net profit of $6B or $6.40 per share. International sales accounted for 64% of Apple’s quarterly revenue and margins increased from 41.4% to 47.4%.
iPhone sales increased by 88% year over year with total numbers coming in at 35.1 million. iPad sales rose by 151% this quarter to 11.8 million and iMac sales rose 7%. However, iPod sales declined 15% from last year. Apple’s surging iPhone orders were contributed to by an increase in demand within the Chinese market. Analysts point to huge potential in emerging markets citing that Apple’s sales can rise from 6 million iPhones in Q2 of this year to 35 million in 2013 due to an increase in demand for phones supporting 3G.
Apple currently has price targets ranging from a low of $270 to a high $1001+ with a median of $725. In a survey conducted with 53 different brokers and analysts, 22 cite Apple as being a Strong Buy, 23 as a Buy, 7 have Hold Ratings and 1 has a sell rating. Three months ago, Apple had 23 Strong Buy Ratings, 26 Buy Ratings, 3 Holds, 1 Underperform and 1 Sell.
With all this good news (which is just the tip of the iceberg), one may wonder why Apple’s stock is selling off. Should you sell your shares or Buy? After doing my own analysis on this topic, it seems that the initial sell off pre-earnings was due to hedge funds and large institutions taking profits and selling a large amount of shares at the same time to protect themselves against a weak earnings number. These large transactions can have a huge impact on the stock price and may be one of the reasons why we saw 2-4% price swings each day. Hedge funds are significantly invested in Apple and employ high frequency trading to create volatility in the markets which creates opportunities to profit for them but hurts the home-gamers like ourselves.
Other sources point to pessimism within the company. Although Apple has a solid balance sheet, great growth potential and a large amount of cash ($100+ Billion; over $100 of each share represents the cash pile Apple is sitting on) some analysts are pointing to the most recent news like the antitrust lawsuit the US Department of Justice has filed along with a potential attack from Apple’s mobile carriers who are showing less interest in subsidizing the iPhone. Apple is also seeing competition from Google which sells Android devices at lower prices.
So what is Apple doing right to offset these negative factors? Some arguments to consider are that the company is still innovating creative products that are in high demand both domestically and internationally. The Apple TV and iPhone 5 are just a few of the potential blockbuster hits that are in development and set to be released at the end of this year along with completion of the iCloud. Although Apple is not the first to create cloud based holding technology, they are becoming one of the founding leaders alongside Google because they understand the long term value in this business and its strategy.
Internationally, Apple’s growth was astonishing. Just within China, iPhone sales were up over 400% according to the earnings call. Revenue touched $7.9B just for the recent quarter and that was before the new iPad was shipped to China. According to the CFO, Peter Oppenheimer, the iPad is just starting to take off. “I have to tell you the new iPad is on fire, we are selling them as fast as we can make them.”
So how many more iPhones and iPads can be sold? Overall smartphone penetration in the US has reached 50% and global penetration is only about 10%. The USA is only about 6% of total global market, so Apple has tons of untapped growth potential left for them to break into.
In addition, Apple’s margins are one thing to look at. The iPhone has about a 40% profit margin. Some may consider this low given Apple’s high retail price for its products. However, Samsung, Apple’s closest competitor in terms of smartphone shipments, only has gross margins of 17%. In the most recent quarter, Apple’s gross margins increased by 47% and still has potential to grow given the products in the company’s development pipeline and the untapped global markets it is planning to expand into.
My opinion is to stay with Apple. Do not sell your shares; instead look at Apple as a long term investment rather than a tradable security. Apple has tons of growth potential in emerging markets and average price targets point to a significant upside, even at today’s levels. If you are not yet invested, my advice is to buy Apple on dips – resistance seems to be at around $570 so I would pick up a few shares there and then slowly buy if the price falls below that level in $20-$50 increments depending on how many shares you want to purchase. I could go on and on about how Apple is still a great company, but that list would never end. Long Apple!