Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Has Apple Turned Around?

Apple (NASDAQ: AAPL) might be turning around and providing a hint of a partial economic recovery. The consumer products giant’s revenues have begun growing again.

Apple reported revenues of $215.64 billion in September 2016 and $218.12 billion in December. That means revenues grew by $2.48 billion, and it indicates a pretty good holiday season at Apple. Unfortunately; revenues were still way below the high hit in December 2015, which was $234.99 billion.

This indicates a partial recovery in consumer confidence. One cause might be that some of the uncertainty over the election has passed. Another is that people are increasing spending on certain items such as electronics.

The Danger to Apple from China

Leading the revenue growth at Apple was the sales of the iPhone 7. Shipments of the popular gadget increased by 5% for a record sales figure of 78.3 million, The Guardian reported.

There is a huge problem looming on Apple’s horizon tough, sales of the iPhone in China, Taiwan and Hong Kong fell by 12%. That cost Apple $16.2 billion in revenue, according to a Guardian article.

This might stem from uncertainties and fears about China’s economy. It also seems to verify Alibaba (NYSE: BABA) Chairman Jack Ma’s warning of a tough economic outlook for Chinese.

One problem here is that China’s economy growth which has been driving Apple’s sales is slowing. This means that China is no longer the cash cow for Apple it has once been.

Apple’s Digital Cash Cow

It appears that Apple has created a new cash cow to replace the iPhone sales in the form of digital services. Apple Pay, Apple Music and the App Store generated $7.2 billion in revenue, an 18% increase over last year.

That more than makes up for the lost business from China and it certainly bodes well for the future. Digital entertainment and related services might help Apple ride out an economic downturn because people want low cost diversions during tough times. Radio and movies boomed during the Great Depression they offered cheap entertainment in a time of hard ship.

One potential problem here is Apple Pay which has been a very tough sale to big retailers in the United States. Major brands such as Walmart (NYSE: WMT), Kroger (NYSE: KR) and Amazon (NASDAQ: AMZN) are still saying no to it. Walmart is America’s largest grocer in terms of volume, Kroger is America’s second largest grocer and Amazon is the nation’s largest online retailer.

The real growth seems to be coming from entertainment such as music, games and movies. I think that growth is certainly sustainable, particularly with the popularity of the iPhone and other digital devices.

How Much Money is Apple Making?

Despite the revenue decline Apple is still making a lot of money. It reported a net income of $45.22 billion and a profit margin of 22.83% on December 31, 2016, ycharts data indicates.

Investors should note that the net income is falling, it was $53.73 billion in December 2015. That means Apple’s net income fell by $8.17 billion over the course of 2016 which is not good.

Among other things; that indicates Apple’s business model and income might not be sustainable on a long-term basis. Some major changes to the company such as new products might be needed for long term growth. That justifies experiments like Apple Pay and the Apple car project.

Yes, Apple is a Value Investment

Despite the drop in income, Apple is definitely a value investment because it still has a vast amount of float. More importantly, the numbers indicate Apple is still a cash rich company and that is not going to change any time soon.

Apple reported having $60.45 billion in cash and short-term investments on December 31. It also generated $65.42 billion in cash from operations, achieved a free cash flow of $23.64 billion and accumulated $331.14 billion in assets.

This cash alone makes Apple a great value investment because it can sustain the 57¢ dividend paid out on November 3 for a long time to come. More importantly Apple is in a great position to invest in research and development and acquisitions which would drive future growth.

It’s also a growth stock because of the 35% return on equity reported for December 31, 2016. All this makes Apple a great all around stock for a portfolio, it’s a value investment, a good dividend payer and it has a lot of growth potential.

If you are looking for a solid investment in tech, Apple is certainly it. This device maker has become a widows and orphans stock and one to hold for your retirement. More importantly its business has turned around and demonstrated resiliency in the face of economic and turbulence on two continents.

a homescontents