One Simple Reason Apple Stock Could Soar
Let’s get one thing straight: Apple Inc.’s (NASDAQ:AAPL) stock price is quite unpredictable. The company’s financial performance has been more than decent and its outlook is ever so bright. Therefore it makes us wonder why such a company is carrying a price to earnings ratio (P/E) in the low teens. Mind you, the company’s low valuation won’t last forever. And Apple’s stock price can have huge upside potential. Don’t believe me? Just take a look at how many iPhone 6s and 6s Plus models have been sold in the first weekend of its launch.
iPhone 6s is Bullish for Apple Stock
iPhone sales have long been the largest revenue source for Apple. In the last quarter, iPhone revenue totaled $31.4 million, representing 63.2% of Apple’s total revenue. Moreover, revenue from the iPhone was up 59% year-over-year. (Source: Apple Inc., last accessed October 3, 2015.)
It looks like growth in Apple’s smartphone business is going to continue. This is because the company had just released a new version—the iPhone 6s and the iPhone 6s Plus. In just three days after the launch, Apple had sold more than 13 million new iPhone 6s and iPhone 6s Plus models. Apple’s CEO Tim Cook remarked that “Sales from iPhone 6s and iPhone 6s Plus have been phenomenal, blowing past any previous first weekend sales results in Apple’s history.” (Source: Yahoo Finance, last accessed October 3, 2015.)
The immediate success of the new iPhones suggests that the company still has a tremendous following. Customers are loving the new features like 3D Touch, Live Photos, and the 12-megapixel iSight camera. Note that the new models are the first smartphones to be equipped with 3D Touch, which can differentiate and uniquely act upon three levels of pressure: a tap, a press, and a deeper press. The new feature changes the user experience quite a bit and developers can create new apps that allow three-dimensional user inputs.
Investors should know that Apple is yet to offer the new iPhone in many countries around the world. Starting October 9th, the iPhone 6s and iPhone 6s Plus will roll out worldwide to more than 40 additional countries and territories. By the end of the year, the new iPhone is expected to be available in over 130 countries around the world.
Pushing for More Content in China
We all know how great Apple’s sales have been in China. Despite the fact that the country’s economic growth has been slowing down, Apple doesn’t seem to be affected. According to the company’s most recent earnings report, Greater China produced the fastest revenue growth. Revenue was up 112% year-over-year to $13.0 billion.
There is a new source of growth for Apple’s business in China—Apple Music. On September 29th, the company launched Apple Music in mainland China. The service was already available in more than one hundred countries and regions around the world, but hasn’t been available in mainland China until last week. (Source: Yahoo Finance, last accessed October 3, 2015.)
In China, Apple Music launched with millions of songs from artists in China and around the world. Each account is invited to a three-month trial period. After the trial period, the service would cost 10 RMB per month. There is also a family plan costing 15 RMB per month that allows up to six family members to use the service. Due to the competitive environment in the music streaming business in China, the pricing is significantly cheaper than in the U.S. where Apple Music starts at $9.99 per month, with family plans costing $14.99.
Other than Apple Music, the company also brought iTunes Movies and iBooks to mainland China for the first time. This means Chinese customers can rent or purchase movies through the iTunes store, and enjoy a wide selection of both paid and free Chinese language books from the iBooks Store.
Launching Apple Music, iTunes Movies, and iBooks in China is a significant move for Apple. Many foreign companies only offer hardware and system services in China and are yet to embrace the content market. Apple is already enjoying the success of its physical products such as the iPhone and the iPad in China. Its operating systems are also widely used in China on a number of platforms. However, other than iTunes and the App Store, the company hasn’t done much in China in terms of content. This is in part because the market is quite competitive and is filled with big-name Chinese companies. For instance, Xiaomi Inc. and Leshi Internet Information & Technology both have dominant positions in the content business. Starting to offer Apple Music, iTunes Movies, and iBooks to customers in mainland China would make Apple a pioneer among multinational companies in China’s content business.
Despite the company’s solid performance and bright outlook, Apple’s stock price did not pick up. On Friday October 2nd, shares of Apple closed at $110.38 apiece, giving the company a P/E of 12.75, quite a low number compared to the industry’s average P/E of 18.32. Moreover, Apple is also paying dividends with a yield of 1.88%. In a stock market where valuations have climbed a lot higher in the past few years, Apple looks like incredible value for the money.