Earlier this month Apple became the first U.S. publicly traded company to reach 1 trillion dollars in market capitalization. The make of the popular iPhone devices surprised some investors with its third quarter earnings report. After the financials were released the company stock rose 4% in after hours trading because Apple showed its EPS grew by 40% year over year, and revenue increased by 17% year over year. One reason for higher sales was the expensive yet highly coveted new flagship, the iPhone X. According to CNBC, there were many analysts “hanging high hopes on Apple’s flagship handset and its climbing average selling price (ASP). The 41.3 million iPhones shipped during the third quarter is basically flat from the year-ago period, but the ASP of $724 is a notable jump from the year-ago period. That ASP bump is likely be because of the pricey iPhone X, which starts at $999.”
The surprising thing to consider is even though Apple shares (AAPL) rose 35% over the past 12 months the stock is still only fairly priced. The fundamentals look strong for the company and it knows how to deliver promising financial reports. Over the past 4 quarters, the company has reported 3 positive, 0 negative, and 1 in-line surprises. The average surprise for this time period has been positive 5.3%. Apple hosted its annual worldwide developers conference (WWDC) in June 2018, though the event barely registered in the stock price. The convention did reveal some meaningful software developments, even though there were not a lot of new innovative features or products shown. According to Jim Kelleher, CFA, of Argus, Apple shares remain “inexpensive compared with the market and peers, and is particularly attractive based on discounted free cash flow valuation. We believe that Apple’s positives are not fully reflected in the share price. We are reiterating our BUY rating and raising our target to $225 from $210.”
Apple has done a great job outperforming others in its industry. AAPL rose 46% in 2017 while the peer group was lagging behind with only 18% growth. However in 2016 AAPL grew only 10%, which slightly fell behind the 12% gain for the peer group. But not everyone is bullish on this tech stock. Darren Sissons, Vice Presi, Campbell Lee & Ross, mentions that although Apple is a great company, its business has evolved. He explains that Apple’s “penetration in developed markets is very high and so its sales are replacement cycle. In less-developed markets, the phone is so expensive that it is difficult to increase penetration. The company has a lot of cash, but it is not using it. In addition, the company has grown so quickly over the last few years that continuing the momentum will be a challenge. For someone who has owned this company for a while, he would recommend taking the cost basis off the table. He doesn’t expect this to have a huge correction, which is what he expects for Twitter, but he does expect Apple to become range-bound.”
Speaking of Twitter, its stock recently experienced a 20% drop after it reported its latest earnings and disappointed investors. Facebook saw almost the same thing. The technology industry can be very fickle. Apple has so far withstood the test of time, but even it had problems in the past. Merely 2 decades ago the company was on the verge of bankruptcy. But then Steve Jobs came back as CEO and turned the whole company around. I didn’t have the foresight to buy Apple stocks in 1998 when it was less than $1/share.
For now it appears Apple is still an okay buy even at these levels. Paying $210 to $215 per share for Apple is a fair deal. But I would be hesitant to buy it over that price range. Amazon and Alphabet may soon reach the trillion dollar market cap level. Personally I think those two companies have more potential to grow than Apple.
This author holds 21 shares of AAPL as of writing this post.