Now that the majority of investors have given up on Apple (AAPL), new investors finally have an opportunity for a solid investment with plenty of catalysts. Several indicators including reduced trading volume and even a greatly reduced number of articles published on Seeking Alpha provide general indications that the investment community has largely given up on the smartphone and tablet leader.
As investors lost interest in the stock at the beginning of 2013, the company finally generated numerous catalysts as the year heads towards the back to school and holiday shopping season. The major product catalysts include a much discussed China Mobile (CHL) deal, the updated iPhone 5 release, a cheap iPhone version, and several other initiatives such as a watch or a TV. Another mostly ignored catalyst is a dramatic reduction of the share count via the large stock buyback program. Most investors overlook the earnings kick from the reduced shares.
Investors need to look no further than last quarter's China revenues to understand the need to sign China Mobile as a customer. For the quarter ended in June, China revenue plunged 14% to only $4.6 billion. Sequentially, the revenue loss was even more dramatic at nearly 45%. During the previous quarter, China revenue had nearly caught Europe as the second largest region behind the Americas. For investors not keeping track, Apple saw a 12% increase in Americas revenue and a surprising small sequential gain.
This begs the question of whether signing China Mobile will solve the problem. The Asia Pacific region saw an even larger year-over-year drop of 18%. The problem could really be related to Samsung (OTC:SSNLF) taking market share in that region.
Clearly signing up China Mobile will only help boost sales considering the company has the world's largest subscriber base of 740 million people. For that reason, CEO Tim Cook recently made another visit to the company. Most analysts see China Mobile as an eventual customer with the ultimate question regarding margins as much as timing. Is a lower gross margin really that bad if it increases the absolute gross profits? Not to mention, Apple needs to expand the consumer base to ensure iTunes remains the ultimate app store.
iPhone 5 Releases
A bigger dilemma might be whether the updated version of the iPhone is capable of stemming market share losses to rivals such as Samsung. Hence a cheaper iPhone might be as crucial to the success of Apple as the newer iPhone 5 model.
Numerous media outlets are rumoring that a plastic version called the iPhone 5C could be released in the fall. It might be crucial as not only could it introduce new customers at a lower price, but also it could be the linchpin to signing up China Mobile while gaining other Asia Pacific customers back.
Both WIRED and Forrester analyst Charles Golvin speculate that the unsubsidized price will fall in the $299-$329 price range for a 8GB iPhone. The suggestion is that the 5C could be subsidized with a contract at a price of less than $100 and possibly free. With the C standing for color, the novelty of multiple colors and a $0 price tag could open up the teenage crowd.
The question that most investors will have is whether a polycarbonate or plastic frame would provide the kind of savings for a gross margin in the similar range as the high-end products. The suggestions would be a reduction in other valued items in the high-end phone in order to justify a $300 price cut from the normal $650 cost.
The major catalyst that is all but certain is the massive stock buybacks undertaken recently. The company has spent nearly $18 billion on it so far this fiscal year, thereby reducing the share count by up to 40 million shares though the company makes the actual number difficult to decipher.
The key facts are the share count declining from 947 million last year to 924 million at the end of the June quarter. The CFO stated that the share count should drop another 11 million shares benefiting from the buybacks during the last quarter alone. With additional buybacks during the current quarter, investors should reasonably expect a share count of around 910 million when the quarterly numbers are reported.
Even after spending $18 billion on stock buybacks and nearly $9 billion on dividends for the first nine months of this fiscal year, Apple actually has substantially more cash than when the year began in October. Of course, part of the reason was the $17 billion added to long-term debt. Still the company could repeat the nearly $16 billion spent on buybacks during the last quarter without any impact on the balance sheet.
The below chart highlights the increasing return of capital to shareholders. Unfortunately the numbers don't include the buyback numbers of the last quarter, but adding those in increases the net payout yield to over 10% and the buyback yield to 8%.
With net cash and marketable securities of around $130 billion and a market cap of around $420 billion, Apple only has an enterprise value of $290 billion. With the stock only trading at around 7 times forward earnings on an enterprise value basis, the company should absolutely use excess cash to continue repurchasing shares.
Many investors incorrectly believe that Apple has a major product pipeline problem when in reality it most importantly faces an Asia Pacific sales issue where domestic firms naturally grab more interest. If the company can eventually sign up China Mobile and release a cheaper version of the iPhone, it should attract a much larger user base. Analysts will fret over the lower ASPs and even possibly margins, but it is absolutely needed to grow the user base and expand the total gross profit pot.
In the end, Apple will use its significant balance sheet to reduce the share float and juice earnings with hopefully another catalyst from the expanded user base especially in China. The stock could very well surge back to old highs based on these catalysts coming to fruition.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.