6 Reasons Why Investors Should Take A Bite Into Apple

Apple, Inc. (AAPL) is expected to revert towards the growth curve during the December quarter of 2016 after a drop in the previous three quarters which led to its first ever full-year decline of sales in a decade. However, as the technology giant prepares to announce its quarterly earnings, the invisible cloud of over-expectation is bound to envelop its stock.

Here’s a closer look at the iPhone maker and why investors should consider taking a bite into Apple.

1. Strong Fundamentals

Although Apple’s FY2016 revenue witnessed some decline, raising discussions over its growth and innovation story, its fundamentals remain intact. Apple maintains a healthy operating margin and in-control debt structure with its cash, cash equivalents and marketable securities totaling a whopping $237.58 billion at the end of FY2016. With a projected revenue between $76 billion and $78 billion during Q1 FY2017, Apple should make a smooth bounce back, both sequentially as well as year-on-year.

2. Repatriation

While Apple is cash rich, 90% of it is held by its foreign subsidiaries outside the U.S. to avoid the heavy taxation on repatriation. Now, with Donald Trump as U.S. President, there is the possibility that a one-time tax of 10% on repatriation may be levied to encourage companies to bring back trillions of dollars of money to the American soil.

More than a decade back, a similar one-time tax holiday on repatriation was provided under the Homeland Investment Act of 2004. A paper analyzing companies during that period points out that “repatriations were associated with significantly higher levels of shareholder payouts, mainly through share repurchases” reflecting good governance and financial health of the U.S. multi-national corporations.

If such a tax rebate is provided again, investors could benefit directly in the form of share buybacks and dividend payouts. If that isn’t the case, such repatriation may be directed towards increasing domestic investment, employment and R&D which would boost growth and hence benefit investors indirectly.

3. Services

While the iPhone continues to be the biggest revenue generator among all of Apple’s products, its services segment has seen an impressive growth in recent quarters. Apple’s services include revenue from Internet services (such as Apple Music, iTunes, and the App Store), iCloud, AppleCare, ApplePay, licensing, and other services. Services is emerging as an important segment of Apple’s revenue stream and is likely to grow stronger as its ecosystem of more than one billion devices expands further.

4. Profit Share

As the global smartphone market is moving towards stabilized long term growth, low-priced smartphones are becoming popular, especially in emerging markets. This trend has notably weighed on Apple’s shipments which are sold much above the average selling price for smartphones.

However, despite all odds, Apple still captured 91% share of all smartphone operating profit worldwide during Q3 2016 as per a report. Further, as 2017 marks the 10th anniversary of iPhone’s debut, there is great excitement building around its next iPhone model.

“The iPhone set the standard for mobile computing in its first decade and we are just getting started. The best is yet to come,” said Tim Cook, Apple’s CEO.

5. Research & Development

Apple is known for keeping its projects under wraps, however, its increased spending on research and development, from $4.5 billion in 2013 to $10 billion in 2016, displays its commitment to innovate and evolve new technology that enhances and expands its existing product range.

Apple is now focusing on advanced technological areas such as artificial intelligence, machine learning, virtual and augmented reality, and automation. In a letter to NHTSA dated November, 2016, Apple wrote, “The company is investing heavily in the study of machine learning and automation, and is excited about the potential of automated systems in many areas, including transportation.” Further, Apple recently joined Amazon, Facebook, Google/DeepMind, IBM, and Microsoft to become a founding member of the Partnership on AI.

6. Dividend

Apple’s quarterly dividend has risen gradually since 2012. The company has paid $2.49 billion, $10.56 billion, $11.12 billion, $11.56 billion and $12.15 billion as dividends and equivalents during 2012, 2013, 2014, 2015 and 2016, respectively. Although its current quarterly dividend is small at $0.57 per share, it acts as a sweetener considering that the company intends to increase its dividend on an annual basis.

Final Word

As the largest company in terms of market capitalization and world’s most valuable brand, investors and analysts alike follow Apple closely, reacting to news concerning the technology giant. While some decline in the market share is bound to occur with rising competition in the smartphone space (especially against low-cost devices), Apple’s brand appeal and customer loyalty remain intact.

Apple is investing in technologies of the future that would open newer revenue streams and is committed to bring innovative products in the market. A healthy balance sheet, decent growth numbers, regular dividend and less volatile stock movement make Apple a healthy pick for an investor’s portfolio. Its shares are up by 28% over the last one year and 5.27% year-to-date, which mean that investors have already factored in decent numbers during its upcoming earnings report on January 31, 2017.

The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Prableen Bajpai

Prableen Bajpai is the founder of FinFix Research and Analytics which is an all women financial research and wealth management firm. She holds a bachelor (honours) and master’s degree in economics with a major in econometrics and macroeconomics. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and a CFP®.

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