Apple Inc. Has New Opportunities in Emerging Markets

Apple Inc. (NASDAQ:AAPL) has been a solid holding so far in 2018, with Apple stock climbing 11.2% this year. In April, management gave a 16% bump to the dividend, while unveiling a robust $100 billion share buyback plan.

Those announcements came alongside a top- and bottom-line earnings beat.

Capital Returns

Most owners of Apple stock are happy with the company’s $100 billion return. Given Apple’s balance sheet strength and free-cash flow, it wouldn’t surprise me one bit to see another $100 billion buyback program launched next year. Simply put, the company has built a mega-ecosystem — one that benefits from a few hundred million consumers willingly upgrading their iPhone each year.

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These same consumers go on to buy Macs and iPads, while downloading “nickel-and-dime” apps, subscribing to Apple Music or renting movies. Those last three examples fall into the “Services” category and it’s Apple’s fastest-growing segment. Just last quarter, Services revenue grew 31% to $9.2 billion, accelerating from the previous quarter’s 18% growth and easily topping expectations of $8.4 billion.

This high-margin segment helps bolster profits while driving growth to the top line. Some investors critique Apple’s capital allocation strategy, which could have been used to buy back stock and acquire growth-accretive businesses. But M&A can be hit and miss too.

One not-so-hit-and-miss segment though? Emerging markets.

Apple in Emerging Markets

We talked about capital returns for a simple reason: Apple will need to find growth down the road. A revamped iPhone lineup helped boost its results because of the big increase in average selling prices vs. the prior iPhone lineup. Over time, though, the bump in average selling price won’t help as much.

In short, Apple needs to find growth in other ways aside from raising prices. One way could be to buy that growth. But with its largest acquisition being for about $3 billion, that doesn’t look like a route Apple wants to go. So, then, what about overseas via emerging markets? Last quarter, revenue from China rose 21% to $13 billion.

China has over 1 billion people in its country, with a middle class that continues to swell in size. That should mean good things for a company like Apple, which owns the top-selling smartphone in the country, the iPhone X. On the company’s conference call, CEO Tim Cook expressed optimism on China, particularly around the Mac and wearables — and especially with its Services revenue.

As promising as China has been, don’t rule out India either. While disposable income in India is lower than in China and vastly below that in the U.S., Apple is working on a long-term footprint to expand its presence in India. Like China, India has a population north of 1 billion people. So if Apple can establish itself now and in the ensuing years, it could help drive sales and profits down the road.

The problem with many international markets simply comes down to price, as well as integration. There’s a reason companies like Amazon.com, Inc. (NASDAQ:AMZN) have struggled and Walmart Inc (NYSE:WMT) had to buy Flipkart. Apple products are far from cheap and launching in countries that have tons of competition at far lower price points, Apple may have trouble gaining traction.

But if it can, look out.

Trading Apple Stock

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chart of Apple stock


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Admittedly, Apple’s emerging markets strategies won’t pay immediate dividends. It’s making strong headway in China and, if it can build on that momentum, it will help Apple stock advance. That’s along with its solid growth, reasonable valuation and massive buyback.

It helps that Warren Buffett is a big fan of Apple too.

In any regard, what’s going on with the stock price? I still believe the company is heading toward a $1 trillion market cap. On Friday, Apple stock came within a stone’s throw of hitting new highs.

After erupting higher this month, Apple stock has been consolidating nicely in the $185 to $190 range. A break higher should help propel it to $200. Should Apple stock price break lower though, a fall to the $182 level could be in the cards, with further support between $177 and $182.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in AAPL. 

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