Most of the negativity surrounding Apple Inc. (NASDAQ:AAPL) seems to be focused on the belief that the company has allegedly lost its status as a leading growth stock. Apple is strictly secretive about new product launches, so there is no way to know for certain what’s in its pipeline of new products. With competitors like Samsung gaining market share in emerging markets, many believe that Apple is now a mature business with uninspiring growth opportunities.
However, there are several reasons to believe investors may be underestimating the company’s true growth potential, and this could have material bullish implications for the stock.
Trading at a forward P/E around 9, Apple Inc. (NASDAQ:AAPL) is certainly not priced for growth. But if we look at the last quarter, which was a big disappointment to many investors and produced a brutal drop of 12% in the stock price, the company doesn’t seem to be doing that bad.
Revenue growth was 18% annually for the quarter, but if we consider that last year included an extra week, adjusted revenue growth would have been 27%. Looking at the two biggest product lines, iPhone sales increased by 29% annually, while iPads showed an increase of more than 48%. Macs and iPods are being displaced by the iPad and the iPhone, respectively, so sales of these products fell during the quarter. Overall revenues were below analyst forecasts for the quarter, but we could hardly say that Apple Inc. (NASDAQ:AAPL) is not a growth company by looking at sales numbers.
Earnings per share increased by an adjusted 7% annually. Lower margins were already expected due to new product launches and both gross and operating margins were above estimates, but falling steeply from previous levels. So, Apple has chosen to put new products over short-term profitability, and Wall Street seems to be punishing the company for lackluster earnings growth.
On Growth and Innovation
Apple Inc. (NASDAQ:AAPL) has launched new products, and that has reduced profitability, at least temporarily. That’s one of the best indications of an innovative growth culture you can possibly find.
Amazon.com, Inc. (NASDAQ:AMZN) is trading at historical highs in spite of the fact that the company has destroyed profitability in the quest for market share gains, yet investors are not looking at Apple Inc. (NASDAQ:AAPL) in the same way. Don’t get me wrong, Amazon is doing the right thing — when you have the opportunity to consolidate a leadership position in spectacular business areas like online retail and cloud computing, thinking about long-term competitive position as opposed to short-term profit margins is the smart thing to do.
Apple is going in the same direction — the iPad Mini has a lower profit contribution per unit, and it cannibalizes the more profitable iPad models. Yet it has been a fantastic success by Apple Inc. (NASDAQ:AAPL)’s standards, as it managed to deliver a high-quality device that is accessible to consumers for a lower price and selling remarkably well.
From Tim Cook during Goldman Sachs’ Technology and Internet conference:
“Over 50% of the people in countries like China and Brazil that were buying an iPad don’t own an Apple product. This is a huge thing for us to go out and show people what Apple is and introduce them to the company. Through the years, we’ve found a very clear correlation between people getting in and buying their first Apple product and some percentage of them buying other Apple products.
“You can go in and accept a lower margin on any product for a strategic reason. That strategic reason might be our entry into that area. At the background, we always know that this halo effect play, we had confidence in our ability to execute the supply chain and walk down costs. In the area of tablets, we think the market is huge and it makes sense to have another product there. People wanted a full iPad experience, but in something smaller and lighter. We have other ways to make money and reward shareholders.”