Apple Will Be A Huge Winner From The Samsung Galaxy Recall

| About: Apple Inc. (AAPL)
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The news just gets worse for Samsung's Galaxy Note 7. Samsung has issued a recall and all four major carriers have suspended sales and exchanges of the Note 7.

Apple is the obvious winner from any damage to Samsung's brand image. Samsung has taken market share from Apple this year, but all that could be undone going forward.

Apple's earnings could grow at a faster-than-expected pace next year. This could result in a higher valuation multiple for the stock.

Apple's (NASDAQ:AAPL) stock is up 10% year-to-date and there could be further gains in store going forward. I believe Apple is about to benefit from a confluence of factors, both internally and externally driven, that could make for a very strong fiscal 2017.

First, Apple will benefit from a full year of the iPhone 7 next year. But beyond that, there are other reasons for investors to be optimistic about next year. Apple will also benefit from easy comparisons next year, as this year saw a notable drop-off in iPhone sales due to the lack of a new release. Plus, Apple continues to derive growth from its booming services business, led by the App Store.

Finally, Apple will be a huge winner from Samsung (OTC:SSNLF) and the debacle regarding the Galaxy Note 7. There have been multiple reports of the phones catching fire, prompting Samsung to suspend production of the Note 7. Samsung issued a recall, and all four major carriers have halted sales and exchanges of the Galaxy Note 7.

As a result, I believe Apple's stock is easily worth over $140 per share, which would imply considerable further upside potential from its current levels.

Samsung's Pain is Apple's Gain

It seems that the news gets worse for the Galaxy S7 with each passing day, which could not be better news for Apple. That is because Samsung is a major force in the global smartphone market. According to tech industry research firm IDC, Samsung held the No. 1 spot in global smartphone market share last quarter, at 22.4%. This was up more than one full percentage point from the same quarter the year before. Samsung's market share gain was driven by a 5.5% year-over-year increase in unit shipments, and IDC specifically mentioned the successful performance of the Note 7 as a key factor for its growth this year.

By comparison, Apple was No. 2 on the list, at 11.8% market share, which was actually down more than two percentage points from the second quarter 2015. Samsung's growth over the past year has catapulted it to nearly twice Apple's market share. But toward the end of 2016 and beyond, Apple could regain a significant portion of what it lost this year. Making meaningful progress against its falling market share and unit shipments would be particularly helpful in China, where Samsung has a strong industry position. Apple's sales in China declined 33% last quarter, year-over-year.

If Apple gains market share going forward, it would be a meaningful catalyst for Apple's stock. That is because any good news for the iPhone is a big deal for Apple, as the iPhone alone makes up more than half of Apple's quarterly revenue. Furthermore, Apple is right on the cusp of releasing the iPhone 7, so it seems the Samsung debacle couldn't come at a more opportune time for Apple.

This is increasingly looking like a public relations nightmare for Samsung. I believe the issue could have lingering impacts for Samsung and its brand reputation, and Apple will be a natural beneficiary. There is a good chance that Apple's earnings will grow more than expected next year, as a result.

Why Apple's Rally May Continue

In my last article about Apple, I stated my bullish view of the company. The stock has performed well since then, and I am reiterating that view. In light of Samsung permanently halting production of the Note 7, I'm raising my price target for Apple stock.

Apple is consistently undervalued in comparison to the market, but I think Apple will see some margin expansion moving forward. A major reason why Apple is perpetually cheap is because the market doubts its growth potential, given that it has a market capitalization in excess of $620 billion. But if Apple takes market share against Samsung, its fiercest competitor, it could be the catalyst needed to get Apple a higher multiple.

Analysts, on average, currently expect Apple will earn $8.96 per share in fiscal 2017. That would represent 8% earnings growth from expected 2016 EPS. But there is a good chance Apple's future earnings growth could come in higher than expected, given its many potential catalysts. At its recent closing price of $116.06, Apple is valued at approximately 13 times forward earnings. By comparison, the S&P 500 Index is valued for closer to 16 times estimates for the upcoming four quarters.

I believe it is reasonable to say that Apple's growth potential justifies a market multiple. Therefore, valuing Apple at 16 times forward EPS would yield a share price of approximately $143, which would represent roughly 23% upside potential from here. Adding in Apple's dividend provides for a 25% total return over the next one year.

Disclaimer: This article represents the opinion of the author, who is not a licensed financial advisor. This article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. Readers should perform their own due diligence before making any investment decisions.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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