All posts from Zacks
Zacks in Our Research. Your Success.,

Why Apple Stock Has a Grade "A" for Value and Growth

Tech bellwether Apple Inc. AAPL has been around for 40 odd years now and these were not without some pretty interesting highs and vicious lows. The company started to attract attention since 2007 when it launched the first iPhone.

Since then it has come a long way.

But of late, it seems that the iPhone maker (and investors too) has been on a roller-coaster ride. The two halves of 2015 had completely contrasting stories to tell. In the first half, Apple became the investors’ darling, having crossed an impressive $700 billion in capitalization, while it was dethroned brutally in the latter half,  losing nearly a fifth of its valuation in the smallest possible time span.

In fact, 2015 could well be termed as a “litmus” test for Apple. So where does it stand now?

We have given Apple a grade “A” on both Value and Growth Style Scores. A real long-term growth potential is what we are betting on.

Let’s go through some parameters that underscore our confidence in the company.

So What is Apple Riding On?

Yes, it’s the iPhone, but also something more.

Despite fears regarding dwindling demand and saturated markets, Apple, is still able to record growth in the smartphone market. Per a Jan 2016 report from IDC, the company’s share in the global smartphone market increased to 16.2% in 2015 from 14.8% in 2014. This is not all, even in a difficult macroeconomic scenario, the average selling price of iPhone has improved remarkably, per the last quarter’s statistics.  Apple, it seems, is playing a smart dual-strategy of deepening its foothold in the U.S. and China (expected to launch iPhone 7) and focusing on newer markets like India (recently launched low-priced iPhone SE).

Apart from the glorified iPhone, Apple has been investing quite a bit in developing and strengthening its ecosystem. The company has leveraged its brand value and technological strength to build a niche for itself in diverse markets with products like Apple Watch, Apple Pay, Homekit, Healthkit, Apple Music, Apple TV and others. The company’s business model is such that the more it strengthens its new products and services, the greater will be the demand (and upgrade cycle) for its iPhone.

The other important growth avenue for Apple is its enterprise offerings, especially since its collaboration with IBM Corp IBM and later with Cisco CSCO. Recently, the company became the official tablet (and app) partner of Major League Baseball dugouts.

Apple has cleverly priced its products so that it gets maximum margins from its core offerings (iPhone and enterprise) while the rest of its ecosystem is designed to add considerable value to consumers.

Okay, so if even that’s not enough, let’s have a look at some statistics.

Numbers for the Speculative Soul!

Apple is one of the few companies that have enough resources to invest in its own growth while simultaneously offering good dividends that rise in tandem with its earnings. It also has a decent share repurchase program.

According to our model, Apple’s long-term growth estimate of 12% is better than the industry's expected growth rate of 8.9%. Also, its return on capital (ROC) is favorable at 30.9% while the same for the industry is lower at 24.6%. This will actually aid the company in driving growth even in the face of inflationary and other macroeconomic headwinds.

Also, though Apple has lost a significant part of value in the last few quarters, the company now appears to be recovering. So far in 2016, Apple shares have returned nearly 6% (S&P 500 had gains of only 1.1%) and that is something for a company with a market cap of over $600 billion (Apr 2016). Even its PE ratio of 12.21% is better than the 17.1% of the S&P 500 index.

Still not enough, we have interesting forecast numbers for Apple that you can look at.

Where is Apple Headed?

The latest Credit Suisse CS report (Apr 3, 2016) predicts that going ahead Apple services will take center stage in driving its growth.

The report emphasizes on the fact that Apple has a very strong base of “affluent” customers (over 588 million at present), who are likely to increase their spending substantially on the company’s premium services. Further, as the number increases, the company will have greater margins from this division. In fact, the report also suggests that by 2020, Apple will reduce its dependency on iPhone, which is projected to contribute only 38% to the total gross margin by then.

Per the Credit Suisse report, spend per user on Apple services is expected to grow at a rate of 85% a year to $113 by 2020 from about only $61 at present. This in turn will allow the services business to contribute nearly 29% of the total gross profit compared with just 15% now.

Perhaps this was a trend indicated subtly by the company’s CFO Luca Maestri when he commented “We have tremendously satisfied and loyal customers who are engaged with our services at a fast-growing rate”.

Bottom Line

The company has been working diligently to strengthen its core and form a formidable cycle of growth from hardware to services and vice versa.

However, it would still be prudent to watch out for some near-term headwinds as it solidifies its business model.

But it is true that growth is far from over at Apple.

Apple carries a Zacks Rank #3 (Hold).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
CISCO SYSTEMS (CSCO): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis Report
CREDIT SUISSE (CS): Free Stock Analysis Report
APPLE INC (AAPL): Free Stock Analysis Report
To read this article on click here.
Zacks Investment Research