Most investors are wary of entering the Apple (AAPL, Financial) rally at this stage, when the stock has crossed $1 trillion in market cap, as they are of the opinion that big companies are rarely a good return-enhancer.
On the surface, this might appear to be true given the fact you can’t expect the sales of a company of Apple’s magnitude to double anytime in the near future. While short-term skyrocketing returns from Apple is now a thing of the past, the stock does seem to have immense long-term potential and presents a good case from a long-term value perspective.
Apple seems to have the bargaining chip with its loyal customer base, as most consumers who are ardent followers and purchasers of its products consider it to be durable and not discretionary. Given the company’s strong pricing power and brand loyalty, a stagnation in sales is not expected anytime soon. Adding to the joy, the company currently has a net margin of 21.98%, compared to the industry median of 3.56%, and an operating margin of 26.6%, compared to the industry median of 4.79%.
Moving on to the quarterly results, the company reported a 1% year-over-year increase in iPhone sales. While the small jump in sales does not appear to be significant, the average selling price rose to $724 from $606 in the year-ago quarter, way above analyst estimates of $693. Moreover, the other products and service segments were strong contributors to Apple’s top line. Other products saw a 37% year-over-year increase in revenue to $3.74 billion. Services saw a 28% increase to $9.55 billion. Since these are high-margin segments, strong numbers present a bullish case for Apple proponents.
“We're now halfway through our fiscal 2018 with nearly $150 billion in revenue and double-digit growth in all of our geographic segments," CEO Tim Cook said during the earnings call. "We generated almost $34 billion in earnings in six months, and we're very bullish on Apple's future. We have the best pipeline of products and services we've ever had. We have a huge installed base of active devices that is growing across all products, and we have the highest customer loyalty and satisfaction in the industry.”
Moreover, despite having a strong global presence, Apple was reported to have only 12.1% of the global smartphone market share. In comparison, Samsung (XKRX:005930, Financial) has 20.9% and Huawei holds 15.8%, presenting an opportunity for the company to capture a higher percentage in the future. As a result, as consumer preferences change and disposable incomes increase, Apple’s premium product positioning is expected to play in its favor.
Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) also reported it increased its holdings in Apple in the second quary by nearly 12.4 million shares, upping its stake to $46.6 billion at the end of June. Following this purchase, Berkshire is second only to Vanguard in the list of top shareholders.Â
Even now, at $1 trillion, Apple’s valuation is attractive compared to its peers. The company's forward price-earnings ratio currently stands at 15.67, compared to the industry median of 15.90. The current price-earnings ratio stands at 18.97, compared to the industry median of 19.39.
Apple is dominating the premium product segment of the smartphone industry. Although the company is witnessing a slowdown in shipment growth, posting a mere 0.7% increase in shipment volumes in the second quarter, revenue growth is strong. Moreover, although market leader Samsung has a larger market share due to its cheaper pricing point, it witnessed a 10.4% decrease in shipment volumes as accidents involving a few of its products and muted demand for its flagship S9 weighed on the company’s top line.
Disclosure: I do not own any of the stocks mentioned.
