Apple (AAPL) is finally in the green year-to-date in 2013, and AAPL stock is up against its 52-week high.
Well, because a 40% run in Apple stock price since July has been built on a number of very real improvements in the business.
AAPL stock is not simply rising on sentiment alone. Here’s why Apple stock has snapped back so strongly and why investors can expect AAPL to keep running in 2014.
AAPL Has High Hopes for China
Access to some 700 million subscribers on China Mobile’s network does not guarantee an extra hundred million units sold, of course. Apple will still have to figure out how to connect with consumers and how to address the lack of subsidies that could put even the cheap iPhone 5C or older iPhone models out of reach for many Chinese.
However, the potential is tremendous in the long term in a region where Apple has languished with rather lackluster reach. Consider that the Apple China market share was just 5% to start 2013 … that’s a lot of untapped customers.
Apple Stock Buybacks Are Big
Sure, Carl Icahn was asking for a bit too much with a proposal that Apple burn $150 billion on a share buyback plan. But his more recent “precatory proposal” for a $50 billion share buyback isn’t quite as crazy … and even if this one gets shouted down, it is highly unlikely that Apple won’t do something to keep the buyback train running.
Remember, the company approved a $100 billion AAPL stock buyback and dividend plan in 2012 — of which about $10 billion was earmarked for fiscal 2013, and more across 2014 and 2015. Many companies double down on buyback plans, and shareholders will at the very least expect Apple to extend this program going forward to reduce outstanding shares.
This will help prop up earnings per share going forward to further juice momentum.
Android Has NOT Beaten Apple iOS
Web analytics firm comScore says that the Android operating system from Google (GOOG) has about 52% of smartphone market share in the U.S. vs. 42% for the Apple iOS software. To some, this is a sign that Google is “better” at the smartphone game.
However, it’s not about market share — it’s about money. And recent performance by Apple on Black Friday and Cyber Monday is proof positive that a smaller share doesn’t mean smaller profits.
Consider that in a recent recap of holiday shopping, tech giant Adobe (ADBE) estimated that the iPad blew away the competition in terms of e-commerce market share. Here’s a quote from a recent press release:
“iOS-based devices drove more than $543 million dollars in online sales, with iPad taking a 77 percent share. Android-based devices were responsible for $148 million in online sales, a 4.9 percent share of mobile driven online sales.”
Say what? With more than half of the smartphone market, Android couldn’t do more than a 5% market share of mobile sales?
So much for the idea that Android has won the smartphone war. Being an e-commerce hub is a heck of a lot more important than simply running software on more devices. This kind of qualitative win for Apple shouldn’t be discounted … especially considering Google is struggling to monetize its Android business better and actually turn a profit from its Motorola unit.
Cash Is Still King at Apple
Don’t think buybacks will result in a big drawdown of Apple’s cash reserves. After all, Apple raised $17 billion this year in a bond offering with rock bottom rates — including $3 billion of debt at just 3.85% on its 30-year bonds!
With over $146 billion in cash and an AA+ credit rating from Standard & Poor’s — just one step away from the ultimate rating of AAA — Apple has a lot of dry powder to affect change in the next several years. This could include acquisitions and buybacks, but also internal projects that could create new markets for the company.
Expectations Are Right for AAPL
With a 40% rise since July and the stock challenging new 52-week highs, it’s fair to say that momentum is back for AAPL stock. And in this sentiment-driven, risk-on environment that goes a long way.
The reason Apple took such a tumble a year ago was the transition of the company from a high-growth momentum darling to something much less sexy — an entrenched player paying a nice dividend but achieving only modest growth.
Adjusting expectations was painful on many fronts. Analysts used to being lowballed by AAPL execs now had to come to grips with the fact that targets were real and not just purposely set low. Investors had to look beyond the here and now as Apple posted its first year-over-year profit decline in nine years. And of course, consumers had to get used to the “wow” factor rolling back as the company failed to pull another tech miracle out of its hat to follow its innovation with the iPod, iPhone and iPad.
But as the tape has shown in 2013, expectations are now more realistic and Apple stock isn’t reliant on the miracle of the first iPhone or an iconic leader like Steve Jobs any more. After all, the company remains down about 20% from its all-time highs in September 2012 when it topped $700 a share — so clearly nobody is claiming Apple is back to its old tricks just yet.
But with more modest expectations and positive momentum as we enter 2014, the stars may be aligning for a nice run in Apple stock.
The valuation is fair with a forward P/E of 12, the dividend is nice at 2.1% and all signs point up.
Sounds to me like even after the recent rebound, Apple stock is a buy.
More on AAPL Stock
- Serge Berger says the charts look good for Apple, too. (InvestorPlace)
- Details on the Apple-China Mobile deal. (WSJ)
- Get the numbers right from Apple in the company’s 2013 10-K filing. (Investor.Apple.com)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not own a position in any of the stocks named here. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.