Apple Is Still Underpriced

In spite of very solid numbers across the board in the last quarter, the market is unimpressed about the prospects of Apple . The company has a very strong stable of new products going into the busy and very important holiday season. And Apple's massive customer-base will be early adopters of its new launched product line-up as well.

iPhone franchise is doing very well
Apple sold a whopping 33.8 million iPhones in the last quarter, driven in part by the company's launch of the iPhone 5s and iPhone 5c in late September. In the recently completed fiscal year, Apple was heavily reliant on its iPhone franchise as more than 53% of total Apple revenues are from the smartphone segment. Apple's iPhone sales grew in all geographic segments from the previous year. In particular, unit sales grew healthily in growing regions like Latin America, India, Russia, and the Middle East.

In spite of selling more iPhones in the last quarter, Apple saw its market share in mobile OS decline in the third quarter. According to IDC, the market share of Apple stood at 12.9% which is a decline from one year ago when its market share stood at 14.4%. Mobile phones running on Google's  Android platform have a whopping 81% market share at the end of 3Q13. Increasingly, the smartphone OS market is becoming a two-horse race. Devices from Samsung made up 39.9% of all Android shipments during the last quarter. 

The fingerprint sensor will make the iPhone 5s a lot more secure, and appeal more to more corporate clients. In addition, the fingerprint sensor will aid in driving up software and service sales on iTunes and the App store.

Due to the open source nature of Android, phones running on Android are not the most secure and Apple can potentially grab more market share in the enterprise and education space.

Apple added NTT Docomo as a carrier in Japan, which has caused an uptick in iPhone sales in Japan in the last quarter. And going forward, this deal with NTT Docomo should improve iPhone sales in Japan substantially.

The market for smartphones is expected to grow significantly in the next few years from roughly 1 billion annually in 2013 to more than 1.7 billion in 2017. And devices running on iOS and Google's Android are both very well positioned to capitalize in this growing area. 

iPad and Mac sales are soft
Apple was shrewd in terms of unveiling iPads just in time for the holiday quarter. The company launched the new iPad mini with the Retina Display and also the light iPad air. In the last quarter, iPad sales growth in emerging regions including the Middle East and Russia was stellar. However, Apple's iPad revenues did decline 14% year-over-year to $6.2 billion. The average selling price (ASPs) for the iPad in the last quarter stood at $439 and is likely to trickle down in the near future, due to higher cost structures, and lower pricing. 

The tablet category is growing faster than the smartphone market, because many users are opting to buy tablets instead of PCs. In terms of units, the tablet market should expand from 2013 levels of roughly 225 million annually to more than 400 million annually in 2017, according to IDC. And Apple's foothold in the tablet market remains pretty strong and should grow bigger in the future. 

Tablet shipments are expected to surpass total PC shipments on an annual basis by the end of 2015, according to IDC. The global PC market shrunk by 10% in the last quarter, but Macs continued to snatch market share.

Apple's CFO stated in the company's earnings call that Macs gained market share in 29 out of the last 30 quarters, in spite of this secular decline in the consumer appetite for PCs. Apple is giving away free software in the form of the OS X Mavericks and iWork; this should aid Apple in developing more rapport with its large installed fan base. 

Going forward
Apple's all-important gross margins were 37% in the September quarter, and in the December quarter the company guided to a gross margin range of 36.5%-37.5%. Apple is increasingly reliant on international markets with overseas revenues making up 60% of total revenues. Apple's cash balance ballooned to $146.8 billion, of which $111.3 billion was offshore. And a sizable portion of this excess cash will be used to reward shareholders in the future. In 2013, Apple repurchased $23 billion of shares, and the company will likely increase its buyback program after the end of the current plan. 

The iOS 7 software got off to strong start from Apple, and iTunes Radio is being already used by almost 20 million users. Going forward, the iTunes Radio product will likely be a stronger force in the Internet radio business and compete more strongly with Google and Pandora. Apple's iTunes and services business generated more than $16 billion in revenue 2013, and going forward, this services business should grow by at least 20% annually and be a major contributor to Apple's total revenues.

Apple's decision to provide software free of charge is a great step forward for the company, because it develops incremental goodwill for the company in the minds of its consumer base. The company is starting out its fiscal 2014 with a very good lineup of products, and the company's revenues in the December quarter might be its best ever quarter as a result. The company's aggressive buyback plan is also boosting its EPS substantially and the stock price should go higher in the near future. 

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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