Since when is a record quarter such a disappointment? Apparently when you’re Apple, the most valuable and profitable company in the world. Apple beat estimates on the top and bottom line, reported a record June quarter, and proved that its ecosystem is stronger than ever. But, judging by the stock price action, you’d think consumers suddenly lost their taste for Apple. Let’s take a look at five core reasons why patient investors may still want to see Apple as a buying opportunity.
The most crucial ingredient of running a successful business is the ability to attract customers and earn a profit. In Apple’s case, money practically grows in an orchard as far as the eye can see. Apple’s net income grew to $10.7 billion ($1.85 per diluted share) in the fiscal third quarter that ended June 27, 2015, compared to $7.7 billion a year earlier. Analysts expected earnings of $1.81 per diluted share. Revenue for the quarter jumped 33% to $49.6 billion, topping estimates calling for $49.3 billion and Apple’s fastest growth rate in over three years.
Apple receives the majority of its revenue from the iPhone. The company sold 47.5 million iPhones in the quarter ($31.4 billion), up 35% year-over-year and a record for the June quarter, but not spectacular enough to please Wall Street’s “whisper number” of 50 million. The Mac and iPad product lines raked in another $6 billion and $4.5 billion, respectively. Apple Services, which includes iTunes and Apple Pay, posted its best quarter ever with a haul of $5 billion.
Apple’s impressive profit history has also allowed it to accumulate and distribute an unprecedented amount of cash. Taking the total of Apple’s cash and cash equivalents, short-term marketable securities, and long-term marketable securities, the company’s cash position grew to $202.8 billion at the end of June. Apple has $47.4 billion in long-term debt, but this is due to its record capital return program. Through March 2017, Apple will return $200 billion to shareholders through dividends and share buybacks. Using debt to accomplish this helps Apple reduce its taxes.
2. Tim Cook
The current leader of Apple might be the most under-appreciated chief executive officer in the market. While it’s obviously true that Cook cannot replace Steve Jobs in the creativity department, investors should not overlook the fact that out of all the people available to take the helm of Apple, Jobs chose Cook. Jobs brought Cook on board in 1998 as the senior vice president for worldwide operations, and he became the company’s chief operating officer in 2005. Cook was even groomed for the CEO role throughout his career at Apple. Due to Jobs’ ongoing medical problems, Cook stepped into the CEO role temporarily in 2004 and 2009.
Cook has made distinct moves to differentiate himself from his predecessor. In early 2012, Apple announced plans to initiate a dividend for the first time since 1995 and approved plans for a share repurchase program. Cook also made a surprising trip to China in 2012 to meet with government officials and drop in on an unsuspecting Apple store in Beijing’s Joy City shopping mall. Although Cook was sent to China by Jobs previously to address Foxconn issues, Cook’s visit as the CEO marked the first time that a serving Apple CEO set foot in China.
Under Cook’s leadership, Apple became the most valuable company by market cap in history, surpassing Microsoft’s lofty peak set in 1999 with the help of the tech bubble. The seeds planted in China are growing. Apple’s China Mobile deal gives Apple access to the largest network in world. In the recent quarter, revenue in Greater China came in at a record $13.2 billion, up 112% from a year earlier. Apple is on track to have 40 stores open in Greater China by the middle of next year, almost double its current amount.
Cook is also able to put the company’s past behind him in order to improve Apple’s position. Apple and IBM recently formed a partnership to create a new class of business apps, a deal that would have been highly unlikely to happen under Jobs’ leadership. IBM is selling iPads and iPhones to business clients worldwide.
A powerful worldwide brand is one of the most impenetrable advantages in the marketplace. Apple’s image does take minor hints from time to time. In an interview with Charlie Rose, Cook himself admitted that Apple screwed up its Maps release.
“It should not have happened like it did, it shouldn’t have come out, and, you know, sometimes when you’re running fast, you slip and you fall, and I think the best thing you can do is get back up and say ‘I’m sorry,’ and you try to remedy the situation, and you work like hell to make the product right,” said Cook. “If you’re probably never making a mistake, you’re probably not doing enough.”
Yet Apple is routinely ranked as one of the most valuable brands in the world. According to BrandZ, Apple is the most valuable global brand, climbing 67% in 2015 to $246.9 billion. In fact, Apple logged the second-biggest rise, with Facebook posting the biggest at 99%. Google ranks a distant second with a brand value of $173.6 billion. Apple and Google routinely battle for the top spot.
Apple has built its brand through clever marketing campaigns and innovative product designs, along with special initiatives for worthy causes. During the holiday season, App Store customers helped make history with their support of Apps for RED, where all proceeds went to the Global Fund to fight AIDS. In April, Cook noted that 100% of Apple’s U.S. operations and 87% of global operations are powered by renewable energy. Apple also announced a new partnership with the Conservation Fund to permanently protect more than 36,000 acres of working forest in Maine and North Carolina to help offset the impact of packaging on the world’s supply of sustainable virgin fiber.
Being in the spotlight has its disadvantages. The smallest hiccup can send shares free-falling. After making a major peak just above $700 ($100 split adjusted) in September 2012, shares of Apple reached as low as $385 ($55 split adjusted) in April 2013. The recent iPhone sales disappointment appears to have Apple free-falling once again. Shares dropped more than 7% after the quarterly report.
Mr. Market doesn’t always value companies appropriately, but that doesn’t mean Apple isn’t an attractive investment for patient investors. Considering Apple’s iron-clad balance sheet and ability to generate massive earnings through its expanding ecosystem, one can easily argue that significant upside remains for investors.
Last year, Apple gained almost $200 billion in market value. That is a remarkable increase for the world’s most valuable company. Apple gave back as much as $60 billion immediately following the quarterly report. Apple faces headwinds such as a slowing Chinese economy and stronger U.S. dollar, but it will undoubtedly release more products this year and attract new customers that will power the ecosystem for years to come.
The technology sector is perhaps the most exciting area of market. Society is becoming more connected by the day and Apple stands to benefit handsomely. Phones are such a large part of our daily lives that 26% of adults in the United States say their mobile phones are more important than sex, according to a survey conducted by Harris Interactive. Forty-two percent of people say their mobile phones are more important than their cars.
Despite the popularity of mobile devices, there is notable potential for smartphones. Cisco released a report last year that found smartphones represented only 27% of total global handsets in use in 2013. By 2018, it’s estimated that over half of all devices connected to the mobile network will be smart devices.
Apple is regularly faulted for not offering more innovation in the way of revolutionary products. Even the Apple Watch is not pleasing analysts as Apple remains hush on its sales numbers — back-of-the-envelope estimates suggest Apple sold somewhere in the neighborhood of 2 million. However, customers are still flocking to Apple products. Considering Apple is still making money like it grows on trees, and sitting on enough cash to develop whatever the next big thing is and then some, patient investors may want to view the latest stock pullback as a buying opportunity.
Follow Eric on Twitter @Mr_Eric_WSCS
More from Money & Career Cheat Sheet:
- Warren Buffett’s 5 Most Controversial Quotes About Money and America
- David Einhorn: Netflix Is an Expensive Movie That Won’t End Well
- Savings 101: Your Cheat Sheet to Financial Security
Disclosure: Long AAPL