Why Apple (Nasdaq: AAPL) Beat the Market by 530%

On Monday, Oct. 27, the world's biggest name in tech came under selling pressure, falling 3.2%.

The following day, the stock of this global leader dropped another 0.6%. All told, the stock lost roughly $33 billion in market value in just two trading sessions.

Predictably, Wall Street went into panic mode. Analysts were either certain that Apple Inc. (Nasdaq: AAPL) would disappoint on earnings or terrified that iPhone sales had weakened, particularly in China.

They turned out to be wrong on both counts.

After the market closed last Tuesday, Apple released a stellar fourth-quarter earnings statement. The news was better than even I expected - and I've been an Apple bull forever.

Apple did more than just turn in a great performance; it turned in record fourth-quarter results.

And the iPhone's off-the-charts sales in China factored heavily in the results.

This is great news for us, because Apple still has a lot of market-beating upside ahead.

Here's why...

Busting Some Myths About Apple (Nasdaq: AAPL)

apple logoThese days, Wall Street seems to lurch from panic to panic. By that I mean we see investors overreacting to the slightest hint of trouble.

Second, as we discussed in July, the Street seems to have Apple on "double secret probation." In other words, analysts hold some wildly inflated expectations for the Silicon Valley legend.

And once you add into the mix all those analysts' concerns about China's slowing economic growth, it's no wonder they're feeling perpetually on edge about Apple.

All of which explains why an odd misperception has gripped the financial media to the effect that Apple stock is a laggard this year.

Let me be clear. Nothing could be further from the truth.

Following those great fourth-quarter earnings, the stock is up 10.2% so far this year. That compares with a 1.6% return for the S&P 500 Index over the same period.

You read that right...

The stock that leads the entire world in market cap, with $665 billion, is beating the broad market by 530%. Actually, by even more, when you factor in money earned from the stock's special dividends, which totaled $3 billion for the period.

Of course, the iPhone remains the biggest gun in Apple's tech arsenal.

In its fiscal fourth quarter ended Sept. 26, Apple sold 48 million of the devices. That means sales of the iconic device grew 22% from the year-ago quarter.

And I believe Wall Street embarrassed itself by overstating its fear that iPhone sales in China were heading lower.


Sales Growth Everywhere

Sales to Greater China, which includes Hong Kong and Taiwan, rose 99% to $12.5 billion. This despite the fact that the iPhone sells for two to three times the price of most locally made smartphones.

But soaring iPhone sales aren't the only reason Apple is shining.

Apple also makes one of the hottest PCs in the world today.

Analysts at IDG say the broader PC market shrank 11% in the quarter. But despite that general downturn, Mac sales rose 3%. That clearly makes Mac the product to beat in this sector.

The company doesn't disclose specific sales figures for its new Apple Watch. Rather, Apple includes Watch sales (along with the iPod, Apple TV, and Beats accessories) in an "other products" category.

But sales of all products making up that "other" category swelled 61%, reaching $3.05 billion.

Add it all up and you have stellar sales and stellar earnings, a one-two punch that beat forecasts in both categories and caught Wall Street flat-footed.

Overall sales rose 22% to $51.50 billion, a slight beat over expectations. But earnings rose 31%, or 40% higher than sales, which shows that Apple's profit margins continue to grow.

Analysts polled by Thomson Reuters had forecast earnings per share of $1.88. Instead, they came in at $1.96, a 38% annual gain.

No doubt, the per-share results reflect the fact that the cash-rich company bought back $14 billion of its own stock during the quarter.

I believe that these results, as great as they are, don't represent any kind of "high water" mark for Apple. Indeed, I still see plenty of upside ahead.

To see why, start with the fact that this quarter only included two business days of sales for the new iPhone 6s and 6s Plus.

With that anomaly out of the way going forward, those two models should help Apple report strong earnings for 2016's first fiscal quarter, which will include the Christmas season.

CEO Cook Drives Apple's Success

China still represents huge growth potential for the firm. CEO Tim Cook says he plans to open 25 more stores there over the next two years, well up from the current 15.

During an earnings call with analysts, Cook sounded very upbeat about Apple's continued growth in China.

He noted that the Chinese middle class, which stood at 50 million five years ago, will have increased some 10-fold to 500 million by 2020, making it 56% bigger than the entire U.S. population.

Meanwhile, the company just introduced Apple TV, the latest generation of its set-top box, to rave reviews.

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The Wall Street Journal said last Thursday that the device uses iPhone-centric technology to deliver a state-of-the-art video streaming experience.

"The TV of the future needs to be as powerful and easy to use as an iPhone, and this Apple TV is the first box - and the first Apple TV - to achieve that," the paper said.

Then there are the inroads the company is making with sales to large organizations, known as the "enterprise" market.

In the fourth-quarter earnings call, Cook called that segment a "major growth vector." The $25 billion in enterprise sales was a 40% increase from the year-ago quarter.

Driving these sales are the alliances that Cook has forged with enterprise tech leaders International Business Machines Corp. (NYSE: IBM) and Cisco Systems Inc. (Nasdaq: CSCO). In all, Apple now has 75 enterprise partners, up from 40 last year.

To keep profit margins flush, Cook is letting these allies do most of the selling of Apple products to big groups. He has no plans to increase Apple's enterprise sales force.

The Best News of All

And let's not forget that at $120 a share, Apple stock is still priced to move. It trades at just 11 times forward earnings. That's a 40% discount from the S&P 500's average.

So, if it just rose to the same level as the broad market, the stock would have a price of about $168, a gain of 40%.

As you can see, plenty of catalysts are still making Apple a great foundational play you can count on to grow in value for years to come.

Follow us on Twitter @moneymorning.

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About the Author

Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...

  • He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
  • He was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
  • As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.

This all means the entire world is constantly seeking Michael's insight.

In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.

Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.

And even with decades of experience, Michael believes there has never been a moment in time quite like this.

Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.

To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.

His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.

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