Despite what Wall Street’s chattering classes want you to believe, there was nothing shocking about the recent quarterly earnings report from Apple Inc. (Nasdaq: AAPL).
Everyone’s acting as though they’ve been caught off guard, but no one seriously thought that the massive boom in iPhone 6 sales was going to be a “permanent phenomenon.”
Now, however, Apple is off 10% since its earnings miss in late April – and nearly 30% in the past 12 months.
As I’ve been telling you for months, it’s times like these when you should carefully consider what these “experts” have to say… and then do the exact opposite.
The greatest stock investor of all time often follows this same tactic – and it turns out that his two handpicked heirs have been following along with us on Apple for several months now.
Expect the Unexpected
Besides the recent earnings miss and the down stock price, activist investor Carl Icahn announced earlier this month that he’d dumped Apple from his portfolio.
Now, enter Team Omaha.
Berkshire Hathaway’s most recent filings show that in the first quarter it was buying up nearly 10 million shares of Apple stock.
Shares of Apple rose about 4% today in the wake of the news.
Buffett’s aversion of tech is well known, and so, unsurprisingly, this move was made by one of his top two lieutenants – either Todd Combs or Ted Wechsler.
Wall Street was shocked, seemingly earnestly, by the news and reacted by pumping Apple shares up 4% yesterday, to just under $94 a share.
But as a big believer in the longtime value of Apple, I wasn’t surprised by the move.
And the Buffett team’s latest investment only solidifies my price target for Apple stock.
Let me show you why…
Don’t Follow the Pack
Apple’s media detractors are of a single mind: When times are good, they’re Apple fans, and when times are lean, they’re fierce detractors
That seesawing opinion is a sign of amateurism. It reflects a shallow understanding of the fundamentals underlying these shares.
Here’s the critical context the anti-Apple set is missing…
This isn’t the first time Doom has knocked on the door at 1 Infinite Loop in Cupertino. In Apple’s earliest days, the markets couldn’t (or, more accurately, wouldn’t) figure out what Steve Jobs’ vision meant for the future. The prevailing analyst opinion at the time was that Apple was going to be a flash in the pan. Eventually, the Apple board even threw Jobs out of his own company, to let the “professionals” fix things. When those pros nearly killed the business, they invited him back.
In the 1990s, Apple was trading, pre-split, at around $12 a share, running on fumes (and the enthusiastic goodwill of graphic designers). But that was all Jobs needed to bring the revolutionary iPod to the market, which got Apple into most U.S. homes.
In other words, this company has come up against and handily beaten much stiffer headwinds than it’s facing in the second half of 2016.
Apple still has the biggest market cap in the business, at $533.39 billion. The company has very deep pockets, too, with some $213 billion socked away. Now, around 90% of that money is stuck overseas and isn’t likely to be “re-shored” anytime soon, but Team Tim Cook could still get their hands on more than $21 billion in cold, hard cash today.
And that “disappointing” earnings report still noted Apple sold a whopping 51.2 million iPhones.
But it’s where Apple is selling those phones that has skittish analysts worried… and myself excited.
Hardwired Into Explosive Growth
Sales in China dropped 11%, accounting for the weakened yuan. But… sales only dropped 7% if the model includes a constant yuan. That’s important, as the Chinese currency is frequently tampered with by the Chinese government.
But now the dollar has weakened somewhat, and as the yuan is still linked to the dollar, the Chinese government’s intervention isn’t as aggressive, so the yuan has regained some of its strength. That will help sales figures moving forward.
Even so, we haven’t even come close to “peak iPhone.” China’s surging middle class is set to quadruple in the next four years, to nearly 450 million people. China’s upper-middle-class ranks will grow, too, to more than 100 million people, or more than 30% of urban Chinese households. And the number of Chinese millionaires will jump to 2.3 million.
All this by 2020…
Tellingly, China is in the midst of a kind of “mass conversion” from cheaper Android devices to much higher-end Apple and iOS products. These types of upgrades were up 40% September through March, compared to the same period a year ago.
Apple drew $58 billion in revenue from China recently, but the company will be an even bigger player there in the years to come, helped by the new iPhone 5SE and that trend toward “conversion.” The 5SE has an iPhone 5 form factor with the “guts” of an iPhone 6. It’s also lower priced than even the original iPhone 5S, which makes the phone a compelling option and a conversion catalyst.
So we have a market full of rabid Apple fans with plenty of money to spend, who will want “iEverything” Apple has to sell – in fact, several devices per affluent household.
And that’s just in China…
Apple has barely scratched the surface in the second-most populous country in the world: India.
It’s still far too early to tell how Apple will fare with 1.32 billion potential consumers on the subcontinent, but the early signs are very good.
Apple now has, or soon will have, everything it needs on the ground to do brisk trade in iDevices. India’s telecom infrastructure is about to crackle with high-speed LTE coverage, and key demographics, such as young people, are skewing wealthier.
So no, we’re nowhere near “peak iPhone.” In fact, I think we’re still looking ahead to days when Apple’s 2015 bumper crop of nearly 62 million iPhone 6s sold seems low by comparison.
Meanwhile, Apple is in the midst of a lull in the innovation cycle, but that’s by no means a bad thing for investors…
The Bargain of the Year
Until the iPhone 7 drops, and possibly further out, the company should be seen as a less of a growth stock and more of a full-time cash cow for investors – like I showed you last week. It’s pouring even more money into its share repurchase program, all the way up to $175 billion.
Apple looks like a fantastic buy right now, and it looks even better when you see what kind of earnings you get for the price. Its price-earnings ratio is 10, while Qualcomm Inc.’s (Nasdaq: QCOM) and Intel Corp.’s (Nasdaq: INTC) are running 50% and 10% higher, respectively. The broader Nasdaq Composite is trading at over 17. Both of those firms have far less growth potential in this market than Apple.
Right now, CEO Tim Cook is paying investors $2.28 for each share of stock – and the board just approved a 10% dividend hike.
Any one of these would make Apple a screaming “Buy!” right now, but thanks to the analyst herd (and the herd of investors that listen to them), we have an opportunity to buy more than $130 worth of stock for slightly less than $93.
Make no mistake: Apple is the long-term bargain of the year, no matter what happens in Asia. Consider adding more at even lower prices.
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