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At A Trillion Dollars, Apple is Still Undervalued

Posted on Thursday, Aug 9th 2018

Last week, Apple (Nasdaq: AAPL) became the first US company to cross the $1 trillion valuation. It was a close race to the trillion dollar club. Here is the Bloomberg chart that shows how close the race was between Apple, Amazon, Alphabet, and Microsoft.

Apple’s Financials

Apple’s third quarter revenues grew 17% over the year to $53.3 billion, in line with the market’s expectations. EPS of $2.34 was significantly better than the market’s expected earnings of $2.16 for the quarter.

By segment, Apple’s iPhone revenues grew 20% over the year to $30 billion driven by the increased adoption of the $999 iPhone X. In terms of volumes, the number of iPhones sold grew a modest 1% over the year to 41.3 million. The average selling prices for iPhones grew 19% to $724 for the quarter.

iPad revenues fell 5% to $4.74 billion despite a 1% growth in the number of units sold. Mac revenues fell 5% to $5.33 billion due to a 13% reduction in units sold. Its services segment grew 31% to $9.5 billion and revenues from other products increased 37% to $3.7 billion.

By region, Apple’s revenues from the Americas grew 20% over the year to $24.5 billion and sales from Europe grew 14% to $12.1 billion. Greater China region grew 19% to $9.6 billion. Revenues from Japan increased 7% to $3.9 billion. Revenues from the rest of Asia Pacific improved 16% to $3.2 billion.

During the quarter, Apple declared a cash dividend of $0.73 cents and repurchased $21 billion in common stock.

For the current quarter, Apple forecast revenues of $60-$62 billion, ahead of the market’s forecast of $59.47 billion.

Apple’s Growth

Apple’s race to the top has been driven by iPhones. But recent research reports reveal that the iPhone may be losing its market standing among smartphones. According to an IDC report published earlier this year, Apple slid to the number three position in global smartphone market share. iPhone’s market share grew from 11.8% a year ago to 12.1% during the second quarter of the current year, but it was no match for Huawei’s growth from 11% to 15.8%. Samsung remained the market leader with 20.9% market share, which was lower than its previous year market share of 22.9%.

Despite the slip in its market position, iPhone’s average selling price grew 19% over the year and beat the market’s expected $693 due to the increased adoption of iPhone X. Apple currently sells more models of the iPhone to cater to various price points. At the release of iPhone X, analysts were skeptical about a market for the high-priced device. But Apple has shown that it knows how to keep the consumer interested. It continues to capitalize on the price by releasing several iPhone X variants that offer customers additional features such as a larger screen while maintaining the high price point. In fact, analysts believe that iPhone’s new release of iPhone 11 could very well be priced at $999 as well.

But it is not just iPhones driving Apple’s growth. During the recent quarter, the company saw strong performance from its wearables segment. On a trailing twelve month basis, revenues from Apple Watch and AirPods grew to more than $10 billion. For the quarter, revenues from these devices increased 60% over the year. According to IDC, the Apple Watch is the biggest wearable device in the market with 16.1% market share. Apple continues to increase the utility of the Watch by adding more features such as exercise functions, podcast support, and predictive features for Siri.

Additionally, Apple is seeing increasing service revenues as more users get drawn to its ecosystem. This was a record quarter for the Services segment as it continues to edge towards its quarterly target of $14 billion in revenues by the year 2020.

I think Apple is still a largely undervalued stock. At the end of the quarter, the company still had more than $240 billion in cash – nearly a quarter of its valuation. Excluding its cash balance, Apple’s P/E ratio translates to a comparatively modest 19x.

Apple still has a lot of room to grow its revenues through its services and other smart devices including wearables – some of which, like the Watch are slowly gaining market share, and will soon drive financial performance.

Apple’s stock is trading at $207.25 with a market capitalization of $1 trillion. It had peaked to a record high of $209.48 earlier this week. It has recovered from the year low of $149.16 that it was trading at in September last year.

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