After the stock split and a surge toward record highs and a double top around $95, the big question now is whether Apple (NASDAQ:AAPL) offers investors any value. The stock has surged over the last year without the company providing much in the way of innovation, potentially eliminating future outsized gains.
Apple continues to offer a lot of promises surrounding future innovation whether with wearables, home controls or even new phones and tablets. With a $556 billion market cap, the company will need to produce something significant to drive the stock higher. Due to its mega size, even the recent Beats purchase at $3 billion isn't very material to its future.
Stock Split Benefits
For a long time, our thought has been that Apple needed to complete a stock split in order to make it more accessible for the average investor and just generally make the stock easier to trade by small investors. With the stock trading at a very low valuation multiple for years now, it only made sense to eliminate this potential constraining factor from the market. The 7-for-1 split that went into effect on June 9 dropped the stock down to just above $90, clearly achieving the goal of lowering the price to normal trading levels.
The stock has surged since trading at around $75 when the original announcement of the stock split took place along with the better than expected Q2 results. Though most detractors will state that a stock split does nothing for economic value of a stock (true from a fundamental point of view that ownership position and retained earnings amount to the same), the mental aspect should've been discounted. With Apple continuously trading at a sub-market earnings multiple, the $600-plus stock price shouldn't be discounted as a contributing factor to that issue.
Still Lacking The Leap Forward In Innovation
The recent Worldwide Developers Conference again brought limited leaps forward in innovation. Apple delivered more advances in operating systems for both mobile and desktops, including the new Swift programming language that excited developers, yet nothing that would drive any significant advances in revenues and profits. Especially nothing that is material to the extent of at least $20 billion in annual revenues that Apple needs to move the needle on a forecasted revenue base of over $180 billion.
On top of normal innovation steps, the company continues to face stiff competition in Asia with Samsung (OTC:SSNLF) and now Xiaomi attracting Chinese customers. Read about the Xiaomi threat to Apple here.
Another problem is that Apple is clearly late to the phablet market. At this point, a larger screen iPhone on release schedule for later this year isn't likely to make a huge dent in the Asian markets if consumers can't afford an Apple product or they've already purchased a device made by an Asian based company.
Valuation Remains The Key
The valuation aspect is where Apple remains the most intriguing. The stock trades at roughly 14x forward earnings and when removing roughly $150 billion in cash, the company trades with an enterprise market of a meager 10x forward earnings.
With that cash load, the stock now offers a 2% dividend and, combined with a huge stock buyback program, is now a top Net Payout Yields stock. Of course, the stock surge from $55 around this time last year to over $90 will decrease the impact of any similar capital return programs going forward.
Analysts forecast solid revenue growth in the 6% to 7% range for the next couple of years that won't inspire huge gains in the stock price. The main benefit the stock has going for it is that it trades at an attractive valuation compared to the market.
With Apple only making a few innovations and with the recent gains on the back of the stock split, the stock probably has more normalized upside going forward. It's still possible that Apple moves up another 20% to 30% based on multiple expansion, but in general the massive size and limited innovation tend to suggest the stock is more likely to move in lockstep with earnings growth in the 10% to 15% range on an annualized basis.
Disclosure: The author is long AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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