Daily Gains Letter

Apple Now #1 in Smartphone Sales in China; Enough to Keep It on Top?

By for Daily Gains Letter |

Apple’s iPhone Success in ChinaTim Cook must be pleased with the results of Apple Inc. (NASDAQ/AAPL). Heck, the company sold an amazing 74.5 million “iPhones” and has become the top seller of smartphones in China, surpassing rival Samsung Electronics Co. Ltd. and China-based upstart Xiaomi Inc. (aka “the Apple of China”). Based on the numbers, China has become a massive growth region for Apple. But is the iPhone’s success enough to keep the stock on top?

Apple Stock Undervalued? Icahn Says So; I Say Maybe

I recently discussed Apple a few weeks ago when the stock was trading at $108.00. It’s now up $10.00 in little more than a week.

Apple Inc Nasdaq

Chart courtesy of www.StockCharts.com

I just watched famed investor Carl Icahn on CNBC. He’s a major shareholder in Apple and a strong critic, especially when it comes to what to do with Apple’s massive $178-billion, or $25.00-per-share, cash balance. Icahn is bullish on Apple and believes the stock is vastly undervalued at around 10X its forward earnings when you discount in the free cash.

Now, I do agree with Icahn that Apple is worth more, but there are some issues the company has to deal with before I would agree with the $200.00 price he was throwing around.

In the fiscal first quarter, revenues grew 30% to $74.6 billion and made a staggering $18.0 billion, or $3.06 per diluted share. Of course, selling the number of iPhones it did definitely helps.

Apple’s iPhone Sales Enough?

Apple is clearly being driven by its iPhone, as sales of its “iPad” and “Macs” were soft. Moreover, the newly minted Apple “Watch” is seeing mixed results. (In my view, I would not spend $400.00 on a watch that is more gimmicky than functional for everyday users.)

The key will be for Apple to grow in areas other than the iPhone. Depending on one product to generate growth is dangerous, so we want to see growth elsewhere. The larger screens of the iPhone have helped, along with the cult following in the stock.

A big plus I see is that international sales now account for 65% of total sales. The ability of Apple to massively grow its market share in China has been impressive, given the higher price point of the iPhone. It seems China has become Apple country.

Clearly, its venture with China-based China Mobile Limited (NYSE/CHL) is working out. Apple’s strong brand awareness as a top global brand is also beneficial.

So while Apple will need to deal with its other products and reduce its dependence on new launches of its iPhone, which only occur every couple of years, I also think the stock is a great example of a keeper for long-term investors who just want to buy and not have to constantly monitor the stock.

Apple an Example of a Good Options Investment Opportunity?

For those investors familiar with options and interested in a stock like Apple, a longer-term strategy to consider may be the use of LEAPS, which are long-term options. As an example, the in-the-money January 2017 $100.00 Apple call option is trading at around $27.00. The trade gives investors two years to pan out. The breakeven is $127.00 per share (excluding fees), which means investors would make money if Apple trades at more than $127.00 by January 2017, or up $9.00 in two years (based on the prevailing share price), which shouldn’t be that difficult.

Please note that this should not be construed as a buy recommendation, but is only meant as an example of the kind of stock investors could consider when looking into a call option strategy.

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