NEW YORK (TheStreet) -- Investing in Apple (AAPL - Get Report) now requires a lot of courage. But if Apple can overcome three key hurdles, the stock will once again prove its mettle and have unlimited wind at its back. Target price: $130 and higher by May 2015.
Here are the key obstacles investors need to worry about: First, Apple hasn't released a "brand new" product in several years, and its best-selling iPhones, iPads and Macs have reached or are approaching their market-share limits.
Second, the long-rumored iPhone 6 and fabled iWatch are just mirages so far. Although most analysts are optimistic that these two products will eventually manifest in a big way, they could still disappoint consumer expectations.
Last, Apple faces strong competition from Google's (GOOGL - Get Report) many Android allies in the global market (Samsung, LG, HTC and Sony). Android-powered smartphones are currently No. 1 in worldwide growth, grabbing 81% of market share in first-quarter 2014 vs. Apple's 15%, according to the International Data, a marketing research firm.
So, why think Apple can triumph over these intimidating barriers? Look to its ever-evolving i-ecosystem.
Apple reported its third-quarter earnings last month, and the results were in line with what most analysts expected. Earnings of $1.28 per share were 5 cents better than the Capital IQ consensus estimate of $1.23. Revenue also rose 6.0% year on year to $37.43 billion vs. the $38.02 billion consensus. The company issued downside revenue guidance for the fourth quarter, forecasting revenue of $37 billion to $40 billion vs. $40.46 billion estimates.
The language that CEO Tim Cook used was predictable: We see some growth here and slowdowns there (primarily in iPad sales). Developing countries like the BRICs (Brazil, Russia, India, and especially China) are keeping iPhone sales high, and we have some "exciting" products in the pipeline.
Let's say Apple does debut a splashy, large-screen iPhone in September (the same launch month for all previous iterations). It will be a game-changer.
Most consumers judge phones by screen size and high-tech bells and whistles such as HD cameras and faster processors. A large-screen iPhone with a fast processor would close the size gap between Apple and its Android rivals and attract huge demand.
As for Google, the Android team is analogous to the European Union, which is united by the euro. But in this case it's an operating system, cannibalized by its brother-and-sister brands.
By contrast, Apple's iOS is like the U.S., powered by the dollar.
Even though these two OS super powers are butting heads globally, Apple has the edge when it comes to harmoniously integrating its iOS software and hardware, precisely executing its designers' vision and setting trends in smart products.
Apple has already sketched out its world-domination plan, penetrating living rooms as well as industries such as education, business, medical and health care. Its tentacles are in everything.
At the core is its prodigious app ecosystem; it's the key to unlimited upside. Ultimately, it doesn't matter what hardware business Apple is in, phones, tablets or even mythical iWatches.
Demand for Apple apps has grown unabated, continuing to break new records: 75 billion apps had been downloaded as of June, the company said.These apps all link back to its user-friendly software platform, which millions use to power their businesses and imaginations. As the operating system grows, so will the capabilities and possibilities for Apple devices. And consumers will be forced to keep upgrading to stay on-trend. Come the 2014 holiday season and 2015, Apple's stock will display its need for speed once again.
At the time of publication, the author was long AAPL, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Now let's look at TheStreet Ratings' take on these stocks.
TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate APPLE INC (AAPL) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and solid stock price performance. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Despite its growing revenue, the company underperformed as compared with the industry average of 8.9%. Since the same quarter one year prior, revenues slightly increased by 6.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
- Although AAPL's debt-to-equity ratio of 0.26 is very low, it is currently higher than that of the industry average. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.18, which illustrates the ability to avoid short-term cash problems.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Computers & Peripherals industry and the overall market, APPLE INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
- 44.56% is the gross profit margin for APPLE INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 20.69% is above that of the industry average.
- Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 47.87% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, AAPL should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- You can view the full analysis from the report here: AAPL Ratings Report
TheStreet Ratings team rates GOOGLE INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate GOOGLE INC (GOOGL) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, disappointing return on equity and feeble growth in the company's earnings per share."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- GOOGL's revenue growth has slightly outpaced the industry average of 11.4%. Since the same quarter one year prior, revenues rose by 13.1%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Although GOOGL's debt-to-equity ratio of 0.05 is very low, it is currently higher than that of the industry average. Along with this, the company maintains a quick ratio of 4.14, which clearly demonstrates the ability to cover short-term cash needs.
- The gross profit margin for GOOGLE INC is rather high; currently it is at 63.35%. Regardless of GOOGL's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 21.44% trails the industry average.
- Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 34.72%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 32.58% compared to the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Internet Software & Services industry and the overall market on the basis of return on equity, GOOGLE INC has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
- You can view the full analysis from the report here: GOOGL Ratings Report