Apple Inc.’s (NASDAQ/AAPL) stock price fell quite a bit during the past two weeks. However, investors should not turn bearish on the stock. Apple just might be the first company to reach a $1.0 trillion valuation, with its stock price soaring to $200.00, $250.00, $300.00, or even higher. Here’s why.
Sales of Apple’s iPhone have been growing consistently since its first launch in June 2007. In the third quarter of fiscal 2015, Apple sold 47.5 million units of iPhone worldwide—a 35% increase year-over-year. The reporting quarter has traditionally been the slowest quarter for the product, but Apple still managed to lock in decent revenue from it; revenue from iPhones increased 59% year-over-year to $31.4 billion.
Some investors are concerned with the declining iPad sales. Yes, iPad sales went down quite a bit. In the most recent quarter, Apple sold 10.9 million units of the iPad, an 18% decline year-over-year. Revenue from the iPad dropped an even larger 23% to $4.5 billion. However, investors should not become bearish on Apple based on the lackluster performance of the iPad. Why? Because the declining iPad sales simply reflect an industry trend—the tablet market is shrinking.
According to a recent report by the International Data Corporation (IDC), shipments in the worldwide tablet market totaled 44.7 million units, a seven percent decline year-over-year. Both Apple and Samsung, the two largest players by market share, experienced double-digit declines in their shipment volumes. However, Apple was still the biggest player in the business, capturing almost a quarter of the tablet market worldwide. (Source: International Data Corporation, July 29, 2015.)
The increasingly huge pile of cash is not major news for Apple. The company’s cash position has increased dramatically over the last few years. In the fourth quarter of fiscal 2012, Apple had $121.0 billion in cash; by the third quarter of fiscal 2015, the company’s cash grew to $202.8 billion. In the most recent quarter alone, Apple piled up $8.0 billion in cash!
The abundance of cash gave Apple the freedom to return some capital to shareholders. The company announced its initial capital return program of $45.0 billion in March 2012. Since then, the amount has been increased to $100 billion in April 2013, to $130 billion in April 2014, and to $200 billion in April 2015. The capital return program is expected to continue through March 2017. Dividends and share buybacks are likely going to be conducive to growth in the company’s stock price.
At the end of the day, a product has to work well in order to sell, and Apple knows this better than most companies. Other than the cool factor, the intuitiveness of its desktop and mobile operating systems has earned the company a massive following. Moreover, in this ever-competitive environment, companies are consistently coming up with new versions of their products. To stay on top of its game, Apple has announced its new operating system for mobile devices—iOS 9.
One of the key features of iOS 9 is the improved user experience of the iPad, with a focus on productivity. Previously, you could only work with one app on the screen. Now, iOS 9 comes with Slide Over, Split View, and Picture in Picture viewing modes, which would give users new ways to multitask on the iPad. It also has a new QuickType features that improves formatting and text selection. I wouldn’t be surprised if the new operating system brings in more iPad users simply because of the increased productivity it offers.
Despite its solid performance and huge potential, investors haven’t warmed up to Apple lately. Since its latest earnings report on July 21st, Apple’s share price has plunged 9.6% from $130.75 to $118.19. This means Apple has a price-to-earnings ratio (P/E) of 13.62, a very low number compared to the industry’s P/E of 18.70. Does this mean that Apple represents great value?
The answer is yes, if you ask billionaire investor Carl Icahn. Last month, Icahn announced that he had sold the last of his shares in Netflix Inc. (NASDAQ/NFLX), and believed that Apple “currently represents same opportunity we stated NFLX offered several years ago.” Analysts estimated that Icahn has made at least $2.0 billion on Netflix. He might be right on Apple, too.