Apple Overview
Following Apple’s mixed earnings report Wednesday night (revenue fell slightly short and earnings beat expectations), the stock price took a hit in after-hours trading which lasted through Friday, finishing the week at $443/share. Although Apple’s earnings were a disappointment to most, there were many positive elements to the report and the sharp decline is primarily a function of how this report compares to the stellar reports of previous quarter. The market has been so accustomed to seeing Apple outperform expectations that an average quarter of revenue and earnings seemed to startle investors. Despite all this recent negativity, we as a firm are more open to the idea of buying into Apple’s decline, as opposed to selling into the current weakness.
Fundamentally speaking, Apple is still a great company and it is now a good value. Its forward P/E ratio is currently 8, compared to the industry average of 16 for technology stocks. If you factor in the $137 billion in cash on its balance sheet, which is roughly 30% of its market capitalization, the stock is essentially trading at 6 times its forward earnings. In the past, investors saw Apple as a growth stock, but given its current valuation it slowly transitioning to a value stock. One of the biggest knocks on Apple coming out of this earnings report was that its gross margin wasn’t what we are accustomed to seeing. With that said, the industry average gross margin is 11.5%, and this past quarter Apple’s margins were an amazing 38.6% but down from 44.7% a year ago. Again, not what we are used to from Apple, but much of this decline can be attributed to new products such as the iPhone 5 and iPad mini.
Moving forward, Bouchey Financial Group will be closely monitoring a number of factors affecting Apple. One significant area will be its ability to continue growing sales in emerging markets. This was a bright spot from Wednesday’s earnings report where Apple’s growth in China showed a 67% rise for the first fiscal quarter compared to a year earlier. There are a number of markets Apple has yet to break into and once these emerging markets have the infrastructure to support the smartphone technology, look for sales to rise in these untapped markets. Another big question is what will Apple do with its $137 billion in cash? Whether they increase dividends, purchase back shares of the company, acquire a separate company or invest in its own R&D, any of these actions will have a unique impact to the share price. Finally, what will be the next big thing to come out of Apple? In the past decade we have known the company to be one of the great innovators, and we think it is poised to continue as a leading innovator in the technology market. We have seen market swings in the past from Apple, and the rebounds in market price usually coincide with great new product offerings. These are a few of the areas will be evaluating in 2013 to better understand the future growth prospects for the company.
In the meantime, should you have any questions as it relates to Apple, or your portfolio, please feel free to reach out to Steven, Marty or Ryan at 518-720-3333.