In my previous article Apple: A Strong Buying Opportunity, I calculated an EPS of $12.04 using weighted-moving average approach, which came nearly spot on the $12.30 actual EPS. So, what does this spell out for the next year, and what risks still surround Apple?
As of now, Apple's (AAPL) stock will experience a heyday as investor confidence is restored and the bulls will rally. The biggest reason for Apple's nearly 2-week drop came solely because of fear. Investors panicked and bought into the fear propaganda which resulted in a massive stock price drop. With confidence restored from actual fundamental evidence, investors will begin buying back into Apple and holding onto the stock past the $650/$700 barriers.
I see much future value in Apple's stock. Its fundamentals are still very strong, supported by increasing demand in both domestic and foreign markets. The foreign markets, especially China, will play a huge key in Apple's long-term success and will push Apple to break new records.
So, where do I see Apple moving from here? I see fierce competition arising from Samsung (SSNLF.PK) and Google (GOOG) over the mobile market share; however, Apple will retain its market share and expand its market size through international market penetration. These foreign markets will play a key role in maintaining strong fundamental stock value.
The iPhone, Apple's biggest profit driver, is experiencing very strong demand, which is driving Apple's value; however, the iPad has been on fire recently. While iPhone revenue growth has grown at 88%, the revenue growth from the iPad stands at an astonishing 151% over last year's quarter. These two products are Apple's key drivers in creating profit, and they're both doing extremely well.
Also, to note, Apple will be refreshing its iPhone product line this year. From what reports are stating, by this October, but maybe as soon as by July from other accounts. Apple has many products in the pipeline which can become game changers, like the iPanel, iWallet, and even the speculated iTV.
From what we've seen, demand for Apple products is stronger than ever, which will continue throughout the year. Now, lets discuss the current concerns.
Apple is still currently under investigation by the Department of Justice regarding e-book price fixing. Fortunately for Apple, the case against them is very weak and should not hold up. Unfortunately for the publishers, though, they may face paying a large penalty. It's interesting to note how Amazon (AMZN) engaged in anti-competitive e-book pricing as well, but was never questioned. I believe that Apple will thwart attention towards Amazon as the DOJ hearings continue.
Now, regarding the speculative issue with iPhone subsidies. This would be a real threat, if it were actually a threat. In analyzing the likelihood of Verizon or AT&T cutting subsidies to the iPhones, lets take a game-theory approach to this. If Verizon cuts subsidies first, then consumers who want an affordable priced iPhone will jump over to AT&T. Since AT&T's coverage and service is very similar to Verizon's, consumers won't mind switching over. This would drive up AT&T's profits tremendously in the long run, even after absorbing the costs of subsidizing the iPhones.
Now, the same is applicable to Verizon; if AT&T takes the first step to cut subsidies, then people will begin flocking to Verizon. Now, here's where it gets interesting. Both AT&T and Verizon cannot cut subsidies at the same time because it'll be considered a monopolistic move, banned by the DOJ. Because of this, Verizon (VZ) and AT&T will be better off subsidizing the iPhones and eating the cost.
Now, the last risk I want to address for now is Apple's competitors. Apple is currently competing against Google, Microsoft (MSFT), Nokia (NOK), Samsung, and Amazon. The only real threats are Google and Amazon - Google with its Android phones and Amazon with its Kindle. Why do I not see them as too much of a threat? Google's current line of phones are widely considered inferior to the iPhone, especially with the operating system itself. A strength of Google's phones is the open-source nature of the App market, which allows for greater innovation and a greater array of Apps; however, this comes at the expense of looser regulations and protection of consumers against the App makers.
Amazon's Kindle has been taking market share, which is why Apple made the iPad 2 a competitor of the Kindle, pricing it at $399. This was a very strong move by Apple in taking back its lost market share. It's true that Apple will end up cannibalizing some of its iPad 3 sales; however, it's better to make some sale, rather than no sale.
I believe Apple will experience a very strong 3rd and 4th quarter as well. I will be releasing more articles regarding my future projection of Apple's earnings as more events occur.
Disclosure: I am long AAPL.