Apple: Why It's What I Don't Know That Excites Me

Aug. 4.14 | About: Apple Inc. (AAPL)


The iPhone 6, iWatch, and iTV are all slated to be released later this year or early next year.

While all three products have the potential to be home runs for Apple, the company's current stock price factors in little to none of that potential.

Given Apple’s innovative track record and current discount valuation, the company is a screaming buy ahead of these product launches.

Time and time again, Apple (NASDAQ: AAPL) has proven itself to be a defining trailblazer of our time. From personal computers and the Mac to tablets and the iPad, Apple has come to play a distinguished role in developing several of the defining consumer electronics many of us use every day.

Therefore, when one of Apple's top brass says that the company has the best product pipeline in the past 25 years right now, you can be sure that I'll be listening.

The Best Product Pipeline in 25 Years

Back in May, Apple Senior Vice President Eddy Cue said this in regards to Apple's pipeline:

"Later this year, we've got the best product pipeline that I've seen in my 25 years at Apple."

Pretty exciting stuff, especially considering the past 25 years haven't been too shabby for Apple. While the rumor mills can get a little out of control (there are entire websites dedicated exclusively to tracking Apple rumors), it is pretty established as to what Apple will launch this year or early next year.

First up will be the iPhone 6, which is slated to be released in September. This iPhone is expected to have a much larger screen display than previous iPhones, either 4.7 or 5.5 inches. Among the other expected bells and whistles, is a new, scratch-resistant Sapphire crystal screen and a faster and more efficient A8 chip.

A month later, Apple is expected to release the iWatch. While Apple may be a little late to the game, as Samsung has already released a line of smart Gear watches, the "wearables" industry is being hailed as the next big thing in consumer electronics. Independent analyst Canalys predicts shipments of wearable smart bands could reach a total of 8 million in 2014, 23 million by 2015, and 45 million by 2017. The iWatch is rumored to be 1.3 or 2.5 inches in size, having a 4-5 day battery life, and containing sensors for collecting health-related data.

Finally, coming either late this year, but more likely next year, will be the iTV. Ever since Walter Issacson's Steve Jobs biography revealed that Jobs had wanted to revolutionize the television industry before he died, the speculation around this product has skyrocketed. Right now, the iTV is nothing more than a little box that allows you to listen to your iTunes music and watch movies and television shows you've bought on iTunes (you can also watch content from some other third-party channels). The new iTV is expected to include a 55 inch to 65 inch Ultra HD display, an alternative to the traditional remote control (voice control, motion sensors, etc.), and a new spin on how we get our television content. According to IHS, a media research firm, 225 million televisions were shipped in 2013.

Why I'm A Buyer

Apple has not officially announced anything. Really the only thing that I would bet money on is that all three of these products will be released sometime in the future. We have no definitive answer on what these products are going to be able to do and what the specifications will be. Nor do we absolutely know how consumers are going to react or what sales are going to be like. Here's the crazy part: I love that.

Each one of these products have the potential to become the next home run for Apple. Before 2010 the iPad didn't even exist. Today, Apple has sold more than $100 billion worth of iPads since first launching the product. The chance is also there, however, that these devices could be major busts.

I'm willing to take my chances, however, for two reasons. 1) Apple has a tremendous track record in innovative success. 2) Valuation-wise, Apple is one of the cheapest companies out there, especially considering all of the upside potential.

Building on that second reason, consider this. Apple trades with a price to free cash flow ratio of 12.43. That is nearly half that of Procter & Gamble's (NYSE: PG) ratio of 24.06. Sure, there is a much greater chance that people are going to buy toothpaste than the next iDevice, but I mean come on, does anyone still believe that Apple's future holds promise?

On top of that, Apple has $164.5 billion in cash and marketable securities sitting on its balance sheets, and is, by far, rewarding shareholders at the fastest pace any company ever has. The company has completed $74 billion of its $130 billion capital return program so far, and currently sports a nearly 2%-yielding dividend.

The Takeaway

The risk-reward profile on Apple right now is just too appealing for me to ignore. There is a really good chance that the iPhone 6 is going to do well, and an even better chance that at least one of the other rumored devices will be a home run. Yet, Mr. Market doesn't seem to care. Apple is being rewarded for its growth potential and massive shareholder reward program with a price to free cash multiple half that of a company whose best chance of growth is coming out with a new type of toilet paper.

I'm looking to add to my already large Apple position in the months ahead. Good luck and happy investing!

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.