It is sometimes with hesitation that we talk about Apple (AAPL) because it is one of the most widely covered stocks. We often try to highlight hidden gems across our coverage universe, but when things are going well…well…things are going well. The iPhone maker has been one of the best performers in the Best Ideas portfolio and Dividend Growth portfolio, and the new products at the September 9 event speak to continued sustainability of strong fundamentals.
The biggest surprise at the event, in our view, was the release of both Apple’s first wearable device (called Apple Watch) and its first payments solution (called Pay).
“The Apple Watch is available in two different sizes and comes with a variety of stainless steel band options or sportier aluminum choices. A sapphire screen is used by Apple with the product. With pinch and zoom not an option, Apple has gone with haptic feedback for navigation. As expected, the device is being called by Apple a health and fitness monitoring answer (source: Seeking Alpha).”
“In a bid to replace physical wallets, credit cards, and other mobile wallet services which have “failed” – according to CEO Tim Cook – Apple released Pay. The company will use its Passbook app and a customer’s iTunes account details to store payment information, while NFC and touch ID technology will be utilized. The major credit card companies are already on board and Apple is lining up powerhouse banks (source: Seeking Alpha).”
Apple Watch and Apple Pay will be new revenue streams for the company, and we think Apple’s brand equity and ecosystem will drive early adopters. These items are distinct sources of upside in our valuation model, and we’d point to the high end of our fair range for Apple as a reasonable estimate of intrinsic worth. Carl Icahn has been adding to his position in shares.
.@Carl_C_Icahn to me on $AAPL: I’ve been adding to my $AAPL position. Where else can you get a growth company at 10x earnings?
— Trish Regan (@trish_regan) September 9, 2014
These announcements, of course, came with the long-anticipated iPhone 6 and iPhone 6 Plus. As expected, the iPhone 6 will be 4.7-inches, while the larger version will be 5.5-inches. Both will feature next-generation retina displays and are quite thin at 6.8mm and 7.1mm, respectively. “The new A8 chip will load graphics 50% faster. Apple will launch iOS 8 on September 17 in front of the September 19 release date for its new iPhone 6 in the US (source: Seeking Alpha).”
Valuentum’s Take
We don’t mean to overdo the positives of Apple, but we continue to like the company and point to valuation upside in the event Apple Watch and Apply Pay perform better than expected in coming years.
From a competitive standpoint, Apple’s entrance into the watch market is largely a non-event for many of the luxury watch makers such as Movado (MOV), Fossil (FOSL), Swatch (SWGAY), Tiffany (TIF), Richemont (CFRUY), LVMH Moet Hennessy (LVMHF), and Hermes (HESAF).
We view the Apple Watch as more functional and hip than ‘status-symbol reinforcing.’ In this light, we would expect wearable technology firms such as Sony (SNE), Nike (NKE), Samsung (SSNLF, SSNGY), Garmin (GRMN), Adidas (ADDYY), and Under Armour (UA) to be more directly affected than the luxury group, though we’ll be monitoring consumer activity closely. eBay (EBAY) is more directly impacted by Apple Pay, but we think the e-commerce space is big enough for a large number of players.
Apple remains a holding in both actively-managed portfolios. The firm is a strong stock because of its enormous free cash flow generating capacity, reasonable valuation, impressive ecosystem, strong customer-focus and retention, growth opportunity (particularly in China and with new revenue streams), and ability to continuously innovate—not because it is popular. We think this distinction is worth mentioning and making as clear as day.
Source: Seeking Alpha