Apple's New iPhone Has Massive Deal for Investors

One of the prominent stocks most hedge fund managers like to keep in their portfolios is Apple (AAPL, Financial). Among the hedge fund managers, Carl Icahn (Trades, Portfolio) is one of the largest holders of the stock. According to GuruFocus data, Apple makes up 21.21% of Carl Icahn (Trades, Portfolio)’s portfolio.

Apple designs, manufactures and markets mobile communication and media devices, personal computers, watches and portable digital music players worldwide. It reported higher-than-estimated third-quarter earnings on Oct. 27. The stock has increased by 9.20% year to date and performed well as compared to Technology SPDR (ETF) [XLK]

Financial performance

Company overview

Apple is a $671.93 billion market cap company. Recently the technology company reported an EPS of $1.96 beating the consensus estimate of $1.88. Apple reported net revenue of $51.5 billion as compared to the same quarter with $42.1 billion of previous year. Apple operates under different segments:

1. iPhone: A line of smartphones that comprise a phone, music player and Internet devices.
2. iPad: A line of multipurpose tablets
3. Mac: a line of desktop and portable personal computers
4. Services: line of Internet services, AppleCare, Apple Pay, licensing and other services
5. Other Products: a line of portable digital music and media players, such as iPod touch, iPod nano and iPod shuffle.

Revenue from iPhone

According to investors' presentation, Apple revenue grew at 22% on a year-on-year basis and it’s because of the launch of new iPhone 6s and 6s plus. The new iPhone had a very positive reception from users; according to Apple, it sold more than 13 million iPhones in a weekend and overall sold 48 million iPhones in a quarter. The new sale is up from the 10 million units that were sold during the first weekend of the iPhone 6 and iPhone 6 Plus launch. Much of the company’s success this year can be attributed to China, but can massive growth in that region continue?

Earlier this year the company received approval from Chinese regulators to sell iPhones. During its fiscal Q2 2015 report back in April, Apple reported that iPhone sales in China outpaced the U.S. for the first time ever. In the last quarterly report released in July, year-over-year growth in Greater China was up 112%. The latest iPhone models were made available in China on launch day, something that wasn’t true of the iPhone 6/iPhone 6 Plus release. iPhone accounts for 56% of Apple’s overall revenue which increased to 63% in fiscal 2015. China continues to drive this growth for Apple. Revenues from China grew 99% year over year.

Revenue from Mac

Mac is Apple’s second-most valuable business segment and accounted for 13% of Apple's revenues. A report from International Data Corporation revealed that overall PC industry declined by 11% on year-over-year basis; Mac sales grew by 3%. Mac not only performed well as compared to the PC industry, but there was a quarterly increase in the units sold by 19%. Its revenue increase by 14% on a quarter-over-quarter basis, the primary reason for the slowdown in Mac’s revenue, was a strong U.S. dollar whose heat is almost faced by every company in every industry. In the PC segment Mac’s peer company Lenovo (LNVGY, Financial) and Hewlett-Packard (HPQ, Financial) both face declining sales. Recently Apple has also launched OS X EI Captain which makes the world most advanced desktop operating system more refined and powerful than ever before.

Reasons for the decline in the PC industry

1. Most users upgrade their existing PCs with Window 10 compared to buying a new system.
2. Intel (INTC, Financial) is going to release its new processor name as "Skylake," a sixth generation core processor that has significant performance, and users are waiting for its launch.

Investors' concern on outlook

For the quarter ending in December Apple disappointed its investors by giving lower guidance to $75.5 billion while the Wall Street analysts were projecting it to be $77 billion-plus. This will be a 2.5% growth on a year-on-year basis. The reasons for the drop in the outlook are:

1. Few increments: Its big screen is considered as a revolution in Apple's iPhone segment; however 6s and 6s plus is considered to have few incremental features.
2. Enterprise earning: Apple is aggressively trying to sell its iPhone to enterprise market. In May, it signed a contract with Cisco (CSCO, Financial), while it signed a deal with IBM (IBM, Financial) last year, and according to the company it managed to earn $25 billion between June 2014 and June 2015.
3. iPad: Apple iPad isalso a concern for the lower guidance as we can see in the above image that iPad sales has decreased over the time, even though iPad is able to maintain a positive number in the sale of iPad, but it has a negative impact on revenue. The iPad segment revenue fell by six percentage points.

New launch

1. Apple recently opened its 25th retail outlet in China to a very enthusiastic crowd, and it is on track to achieve its target of 40 stores.
2. In the TV segment Apple has built a new foundation, with a new operating system called TVOS, an innovative way to connect with your screen and a smart use of Siri.
3. As Apple Pay is seeing double-digit growth, management is planning to add major businesses including Starbucks which will roll out Apple Pay support to all its U.S. stores in 2016.

Wall Street expectation

The stock's consensus price target is $200 with a median target of $150. Among the 52 analysts who cover Apple, 37 have assigned buy ratings, five assigned outperform ratings and eight have assigned hold ratings.

Relative valuation

The stock is currently trading at a multiple of 8.43x of EV/EBITDA basis and has a P/E ratio of 13.07x which is lower than the industry median of 18.72 but on a price-to-sales basis the stock is trading higher at 2.88 as comparison to industry median of 1.35

Hedge fund holdings

With 52 million shares Carl Icahn (Trades, Portfolio) is Apple's largest shareholder among the gurus. Other guru shareholders are Chris Davis (Trades, Portfolio), David Einhorn (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) who is continuously increasing its holding in this company since Q4 2014. Below is a glimpse of Carl Icahn (Trades, Portfolio)'s holdings in AAPL since the third quarter of 2013.

Note:

1) Hedge fund holdings image is taken from GuruFocus.

2) Apple product comparison quarter-over-quarter image is taken from company presentation and financials.

3) The above images of financial performance are taken from Marketrealistic.com