I have written on Apple (AAPL, Financial) before with a bullish view and an opinion that it is more a dividend stock than growth stock.
At the onset, I would like to mention that the stock has already moved higher by 34% in the last eight months. Even after this upside, there is more juice in the rally for Apple.
Coming to first-quarter 2017 results, Apple reported revenue of $78.4 billion and EPS of $3.36, beating revenue and EPS estimates by a comfortable margin. This is the first reason to believe the stock will be moving higher in the foreseeable future. Further, Apple has provided guidance of $51.5 billion to $53.5 billion in revenue for second-quarter 2017; a relatively healthy upcoming quarter will ensure that sentiments remain positive for the stock.
Looking into specifics, Apple reported iPhone revenue growth (year over year) of 5% for first-quarter 2017 while iPad revenue slumped by 22%. I expect this trend to continue, and it is important to note that for first-quarter 2017, services revenue surged by 18% to $7.2 billion. This offsets revenue depression in the iPad segment. Another important observation from first-quarter 2017 results is that Greater China revenue declined by 12% on a year-on-year basis with the rest of Asia Pacific witnessing 8% revenue growth. I see this trend for Greater China as temporary; in the coming quarters, China and the rest of Asia Pacific will continue to be one of the key revenue drivers.
In terms of new product launches, there are talks about a new MacBook launch, and investors will also be looking forward to the launch of iPhone 8 sometime in 2017. This year marks the 10th anniversary of the iPhone launch, and there might be something special in the offering. At the same time, markets are expecting Apple to work toward reversing the sliding sales for iPad and a newer version is likely in 2017. The key point here is that Apple has a decent pipeline of new launches, and this is the factor that provides a strong revenue bump.
While new product launches and steady revenue growth will continue to provide positive momentum to the stock, Apple has been creating significant shareholder value through share repurchase and dividends. To put things into perspective, Apple reported operating cash flow of $27 billion for first-quarter 2017, and the company returned $15 billion to investors through share repurchase and dividends in the quarter. Going forward, I expect dividends to swell as growth remains steady on the back of new product launches. An aggressive share buyback program also supports the stock, limiting downside.
At some point Apple will be pursuing big inorganic growth considering the cash glut the company has in its balance sheet. Inorganic growth is likely to be in the area of high innovation and technology. Apple has been acquiring 15 to 20 companies per year in the last four years. While the size of acquisition is small, the objective is to pay for innovation and at some point these acquisitions will deliver big returns.
Apple remains attractive even after decent upside in the last few quarters. The company has a good outlook for second-quarter 2017 and with new product launches in 2017, the positive growth momentum for the company is likely to continue. Also, dividend investors will find this stock interesting for the long term with Apple already providing dividend payout of $2.28 per share.
Disclosure: No positions in the stock.
Start a free seven-day trial of Premium Membership to GuruFocus.
