If you think Apple Inc. (NASDAQ:AAPL) stock is down because of its fundamentals, think again. Sure, the “iPhone” maker does not look as appealing as some of the big names in the Internet industry. But the company is still sound and the situation involving its hardware business might not really be as bad as you think.
Allow me to explain.
This Could Be a Big Driver of Apple Stock
First, let’s admit that the hardware business is not easy. For a device-maker to grow its user base, it needs to convince more consumers to buy its products. If you are a social media company, on the other hand, consumers can sign up for your service without taking out their wallets.
The nature of the hardware business has dampened the appeal of device-makers, especially as economic growth has slowed down around the world. AAPL stock has lost a quarter of its value since last summer. Fitbit Inc. (NYSE:FIT) and GoPro, Inc. (NASDAQ:GPRO) have plunged considerably more.
While headwinds have been going strong at hardware companies, don’t think for one second that Apple is in the same boat with other device-makers.
Thanks to the late Apple chief Steve Jobs, the company introduced a slew of revolutionary devices in the past two decades. Moreover, the “iPod,” iPhone, “iPad,” and “MacBook” have all been incredibly popular and profitable.
Years of success have put Apple under the microscope. If any of the company’s products shows signs of slowdown, investors get worried. And that’s basically what happened recently.
For instance, Apple’s earnings report in October 2015 suggested that the company had beaten Wall Street’s expectations in both revenue and earnings. Moreover, shipment units for its core product, the iPhone, surged 22% year-over-year to 48.04 million units. But while growth was solid, iPhone’s shipment volume fell slightly short of analysts’ expectations—and investors did not like that at all. (Source: “Q4 2015 Unaudited Summary Data,” Apple Inc. web site, October 27, 2015.)
The same thing happened with Apple’s earnings report in January. Although the company sold a whopping 74.8 million iPhones, the number missed expectations again. Just like last time, investors were not impressed. (Source: “Q1 2016 Unaudited Summary Data,” Apple Inc. web site, January 26, 2016.)
Since iPhone sales make up the bulk of Apple’s revenue, these concerns are warranted. But let’s not forget that the company has a solid track record of opening up new markets. And right now, it’s expanding its presence in another multi-billion-dollar industry.
I’m talking about the wearables market, which, according to International Data Corporation, grew 171.6% last year. (Source: Press release, “The Worldwide Wearables Market Leaps 126.9% in the Fourth Quarter and 171.6% in 2015, According to IDC,” IDC web site, February 23, 2016.)
Apple bears will argue that Fitbit is still the leader in wearables, and that Apple has yet to take the throne. But if you take a closer look, you’ll see that the two companies are not exactly competing in the same game.
Fitbit’s core business is making fitness trackers, while Apple made its foray into the wearables market with the “Apple Watch.” Although the Apple Watch can also be used as an activity tracking device, it is a smart watch and has much broader functionality.
In the smart watch industry, Apple is absolutely dominating. This is particularly impressive because the company wasn’t even in the smart watch business a year ago.
So how dominating is Apple? Well, according to Juniper Research, in spite of only launching at the end of April, the Apple Watch claimed 52% of global smart watch shipments in 2015. (Source: Press release, “Apple Watch Claims Over 50% of 2015 Smartwatch Market in Less Than a Year of Sales,” Juniper Research web site, January 12, 2016.)
Apple does not break out specific sales figures of the Apple Watch, but includes the device in an umbrella accounting category named “Other Products.” In the three quarters after the launch of the Apple Watch, revenue from “Other Products” increased 49%, 61%, and 62% year-over-year, respectively. Judging by the composition of “Other Products” (which includes sales of “Apple TV,” Apple Watch, “Beats” products, iPod and Apple-branded and third-party accessories), Apple Watch should be the main driver behind the growth.
The Bottom Line on AAPL Stock
At the end of the day, companies have to make money. So it’s a good thing that Apple is hugely profitable. In the most recent quarter, gross margin expanded to 40.1% from an already-large 39.9% in the year-ago quarter. (Source: Press release, “Apple Reports Record First Quarter Results,” Apple Inc. web site, January 26, 2016.)
And let’s not forget how inexpensive AAPL stock is right now. Trading at $97.97 on Monday at around noon, Apple has a price-to-earnings multiple of 10.41. Moreover, the tech giant is also paying dividends with a 2.12% yield. Considering new channels of growth that the company will roll out in the future, AAPL stock looks like a bargain.