Will Sleeping Giant China WAKE UP Apple’s Stock Price?
Apple Inc. (NASDAQ:AAPL) recently held its annual Worldwide Developers Conference in San Francisco. Speculation had been building for months that the world’s largest company by market value would unveil some revolutionary product such as a television set or a new iPhone. Instead, analysts and investors were treated to a resolutionary MacBook line with Retina display. The company also introduced OS X Mountain Lion and iOS 6. While Apple’s stock performance may represent a disappointed WWDC crowd, the stock price also shows an undervalued company.
Shortly after the conference, Apple shares closed the day 1.6 percent lower at $571. The immediate reaction was that the event lacked the innovation that Steve Jobs brought to the stage for so many years. However, Apple’s new features better position it for more growth, specifically in China. The tech giant’s new operating systems will better integrate microblogging site Sina Weibo (NASDAQ:SINA), search engine giant Baidu (NASDAQ:BIDU) and Chinese video services such as Youku (NYSE:YOKU) and Tudou (NASDAQ:TUDO). Mountain Lion also includes eight new fonts, from modern to classical for Chinese users, and supports more than 30,000 Chinese characters. Siri, Apple’s voice-controlled system, will also be able to speak and understand Mandarin and Cantonese.
China will prove to be a huge catalyst for Apple shares in the coming years. As long-time readers know, a ‘Catalyst for a Stock’s Movement’ is a key variable in our CHEAT SHEET investing framework. The nation is the world’s largest mobile market by subscribers and the second-largest PC market by unit shipments. In the previous earnings report, Apple CEO Tim Cook said the company’s performance in China was incredible. “It is mind-boggling that we can do this well,” explained Cook on the earnings call. Apple’s revenue in China for the first half of the fiscal year totaled $12.4 billion, compared to $13.3 billion it made in the entire previous fiscal year.
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Although Apple’s growth in China is just starting to heat up, shares still trade at a relatively low price-to-earnings multiple of about 14. In comparison, Facebook (NASDAQ:FB) and Amazon.com Inc. (NASDAQ:AMZN) trade at multiples of 88 and 179, respectively. In terms of market capitalization and price-to-earnings ratio, the closet competitor to Apple appears to be Google Inc. (NASDAQ:GOOG), which trades at a ratio of 17. If Apple traded at a price-to-earnings ratio closer to Google, it would be pushing $700 per share. Apple is even moving in on Google’s turf by replacing Google Maps on its devices with its own Maps app, which allows users to zoom, tilt and rotate in extreme detail. The improved visuals will come along with spoken turn-by-turn navigation and real-time traffic updates.
Even with its under-loved P/E ratio, shares of Apple have still outperformed other popular technology names. As the chart above shows, Apple has gained more than 40 percent year-to-date. The worst performers of the year have been Facebook and Zynga Inc. (NASDAQ:ZNGA). Facebook just went public in May, but Zynga has been trading since last December. On Tuesday, shares of Zynga hit a fresh all-time low below $5. The social-gaming company’s growth has been in question for months and plays a small role in the overall mobile experience. As Tim Cook stated at WWDC, the iOS App Store has 650,000 apps with over 30 billion downloads. While hot initial public offerings like Zynga come and go, Apple has shown itself to be a real powerhouse for years to come.
In an interview with CNBC, senior tech analyst Peter Misek from Jefferies explained that he is still bullish on Apple’s stock because of the improvements seen in their operating systems and Siri. Furthermore, he still expects a television set to be announced by Apple later this year. Misek currently has a price target of $800 on Apple shares.
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