Apple missed earnings and the stock fell 4% based on concern that iPhone sales were slowing and revenue was weaker than expected. To some, this means that the profit trajectory for this company is irrevocably changed and further growth will likely be negatively impacted on an ongoing basis. To us however, the 4% drop on Wednesday provided us an opportunity to add to our position.
Here are the 5 reasons why we think Apple is still a buy:
• The downgrades rolled out by investment banks and brokers impacted the outlook for the stock among investors at these firms. But let's be clear that these companies that have reduced target prices still see Apple as touching north of $650 a share. Let's not be greedy here; from its current price to $650 that’s a 15% increase. Is that really such a bad return?
• The valuation of Apple, when considering the $115 billion of cash in the bank, is not overly rich. When considering the growth trajectory of this company, we believe it to still be undervalued relative to its long-term prospects. Forget about the share price at $570 and instead think about valuation metrics. The price per share is less important than the eventual potential earnings per share (as well as the free cash flow) of this highly profitable company. In our view, Apple is still priced at a discount.
• iPhone 5 will add massive revenue to the company's top line and is the next upgrade that will move the needle. The iPhone 4S was hardly revolutionary and for that reason we expect pent-up demand for the new version. With the world heading towards 4G it will be a logical upgrade decision for millions of iPhone owners. Additionally, Android sales which have capitalized on capturing the 4G market, will finally begin to lose a monopoly position as iPhones utilize faster data feeds.
• China iPad sales are finally now just beginning after a contested trademark dispute with Proview. The last time I was in China last quarter, the hope was great that iPad would finally be available officially rather than through gray market importers. I will be in Shanghai next week and I'm looking forward to visiting Apple stores to gauge demand and discuss with technology business executives their view on future sales of Apple's tablet. I expect to hear that demand is strong and this will greatly benefit Apple's revenue line in the 4th quarter.
• Wireless technology is a tailwind business segment. At Destination, we have developed a method of trend analysis called Thematic Allocation Strategy (TAS). Essentially, we examine areas of the economy which will likely grow at a faster rate and invest in best of breed companies in these rapidly growing segments. Apple is well-positioned to capitalize on the continuing transition away from desktop computing and towards wireless communication and connectivity.
While it is true that Apple is not immune from competitive attacks from companies like Samsung or a slowing economic landscape (including the implosion of Europe), that does not mean Apple is destined for decline. iPhone slowing sales which were the focus of many analysts comments. But sone needs to recognize that exactly the same phenomenon occurred when the iPhone 4 was delayed passed its normal release date. Critics at the time said Apple surely must be towards the end of its ability to grow revenue in the iPhone business. They were wrong and we believe that there is ample evidence that Apple will continue to generate massive free cash flow and capture market share in all of its segments. iPhone will lead the revenue growth.
Will Apple grow exponentially forever? Of course not. But it really doesn't need to to still be a profitable investment. Will Apple continually double and double and double as it has in the past? Certainly not but that does not make it an unappealing investment. Buy this company for a 10% to 25% return. You may make more if things play out perfectly but if you are stuck with the return of 20% is that really so bad? In an environment where returns are hard to come by, maybe it's okay to settle for a 20% gain.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.