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The Apple Comeback Begins
By: Wyatt Investment Research
Apple ( AAPL ) may have just reported a pretty mediocre quarter. But with shares popping $20 yesterday, there are reasons to believe that this is the start of a huge comeback for the world's largest tech stock.
On the surface, Apple's third-quarter earnings were nothing special.
Profits continued to sag, declining year-over-year for the second straight quarter after a decade of nothing but growth. Earnings per share of $7.47 were at the lowest level since 2011. Meanwhile, iPad sales are slumping, falling to 14.6 million units from 17 million sold a year ago.
Apple's earnings weren't all doom and gloom, however. That's why the stock got a nice 5% boost on Wednesday, closing at its highest level in more than a month.
In reality, there was plenty to like about Apple's fiscal third quarter. For starters, the company did manage to narrowly beat analyst estimates for earnings and revenue. That's something it hadn't done in two of the previous four quarters.
Granted, not much was expected from Apple's latest earnings. That allowed the company to clear a relatively low bar by its lofty standards. But a win is a win come earnings season - not matter how it's accomplished.
And there were other reasons to like Apple's latest earnings report. Here are three positive signs that the world's most profitable technology company may be on the verge of ending its 10-month slump:
iPhone Sales Were Way Up
A whopping 31.2 million iPhones were sold last quarter. That's 51% more units sold than in the same quarter a year ago, and well ahead of the 26.5 million estimate. So much for the theory that consumers are growing weary of Apple's iPhones amid competition from Samsung's Galaxy S4 and Google's ( GOOG ) Nexus. Competition from those two rivals is definitely growing. But it hasn't been the death of Apple's iPhone. Prior to this week's earnings, some analysts had insisted that iPhone sales had already peaked. A 51% year-over-year sales increase suggests that the iPhone continues to dominate, and the company has no problem finding new buyers.
Emerging-Market Sales Are Growing
Apple is most definitely a global brand. However, the company is just starting to penetrate some new and potentially profitable markets.
Apple's growth in emerging markets was impressive last quarter. The company sold a record number of iPhones in Russia. Sales were up 400% in India, 140% in the Philippines. Apple's China revenues, while down in the recent quarter, totaled $27 billion over the past 12 months, a number that by itself would put the company at No. 112 on the Fortune 500.
As sales in the U.S. and Europe slow, Apple will rely more heavily on emerging-market growth in the coming years. And that's fueling speculation that the company is working on a lower-priced iPhone that would have appeal in emerging markets.
"Amazing New Products" Around the Corner
What has plagued Apple's stock since last September is the absence of new products. Despite strong sales, new versions of the iPhone or iPad no longer impress Wall Street. Investors want to see something truly groundbreaking from the world's most innovative company.
Rumors of new Apple products have swirled for months. On Tuesday, CEO Tim Cook confirmed that speculation by promising that "amazing new products" are on the way. Some could be introduced as early as this fall.
What qualifies as "amazing" is anybody's guess. It could be a new " iWatch " - a wearable electronic device that slips around the wrist like a watch. Or perhaps it will be the long-awaited Apple TV, something Cook said is "an area of intense interest" for the company.
Regardless, new products are what move Apple's stock. Until recently, new iPhone or iPad product announcements resulted in an automatic 10-12% boost for Apple shares. That's no longer the case. Investors want to see something truly new from the world's largest technology company.
If those products are as "amazing" as Cook says, they could be just the catalyst Apple needs to get out of its current rut.
At this point, investors are desperate for good news from Apple. Prior to Tuesday's earnings, the stock had fallen 40% since reaching $700 a share last September. Even this quarter's earnings - which narrowly exceeded expectations - were enough to send the stock higher by $20. And the stock is now 14% above its recent low of $385.
There's a lot to like about Apple at this depressed valuation. It's currently trading at just 10 times forward earnings. Wall Street analysts are generally optimistic about the stock, with an average price target of $539.
I've been bullish on Apple as well. A few weeks ago, I personally bought more shares when the stock briefly fell below $400. And I recommend buying shares on the dips - particularly if you can get it at less than $400 a share.
With iPhone sales still growing, emerging-market business still expanding, and some new products in the pipeline, there are plenty of reasons to believe that a comeback for Apple shares is coming soon. The world's largest technology company shouldn't be stuck in the mud much longer.