3 reasons to invest in Apple now

August 18, 2015, 2:45 PM UTC
Streaming-Service Apple Music
ILLUSTRATION - Ein Kopfhörer umgibt am 11.06.2015 in Erfurt (Thüringen) ein iPhone mit dem Schriftzug "Apple Music". Photo by: Sebastian Kahnert/picture-alliance/dpa/AP Images
Photograph by Sebastian Kahnert— picture-alliance/dpa/AP

Apple Inc. (AAPL) has had a tough couple of weeks. The company showed strong growth in the last quarter, but the oversized expectations of Wall Street, worries about future iPhone sales, a likely weakness in the Chinese market for U.S goods due to the country’s recent devaluation of its currency, and a tepid start for Apple Music, have all conspired to hammer the price of its stock. As of Tuesday, shares have fallen by almost 13% from its 52- week high of $134.54.

Yet there are still several factors working in Apple’s favor, and here I list three big ones to watch:

Force Touch

Apple’s new iPhone releases are always popular, but the one thing that virtually guarantees good sales is offering substantially new features. The iPhone 6 family, for example, offered much larger displays than previous models and a nifty fingerprint reader that enabled easy access from the lock screen. The device generated record-breaking sales for the company in the first few quarters of its release.

The iPhone 6S (or 7), which is expected to come out this fall, will reportedly have the Force Touch feature. Force Touch, currently available on the Apple Watch and MacBook Pro, enables the device to distinguish between light taps and longer ones, and assign different functions to them. That lets users access commonly used commands quickly and without having to go through multiple steps, which is very useful for everything from emails to maps.

Force Touch isn’t wildly radical, but its addition to the iPhone could provide a big boost to the phone’s utility and enhance the user experience. That will likely keep the iPhone relevant and fresh in a competitive marketplace, at least for another cycle, and that is what investors should focus on.

Dr. Dre

Dr. Dre’s first album in 16 years, Compton: A Soundtrack, has been a modest hit for Apple so far. The album was streamed 25 million times during its first week on Apple Music, grabbing the No. 2 spot on the Billboard charts. While the album’s performance was less impressive than that of some competitors, many of which benefit from Spotify’s larger user base, it’s worth remembering that it’s still early days for Apple Music. Dr. Dre’s album may just be the beginning of a long and successful run.

In addition, Straight Outta Compton, the Universal Pictures biopic chronicling the rise and fall of the rap group N.W.A., surpassed analyst expectations when it opened to $56.1 million over weekend. The movie is being propelled by great reviews, cultural relevance due to the current racial tensions in the U.S., and strong word of mouth. If the movie maintains its momentum, it should boost Dr. Dre’s album and generate free publicity for Apple Music.

Dr. Dre’s return to the spotlight could also help to propel sales of Beats headphones, which Apple acquired from the rap star in 2014. While Beats is a relatively small part of Apple’s business and Apple Music has basically cannibalized Beats Music, the headphones business has the potential to grow through cross promotion with Apple Music. The popularity of Dr. Dre’s new album could at least create a marketing splash for the Beats brand, which can only help.

[fortune-brightcove videoid=4321262854001]


Share Buybacks

Earlier this year, Apple increased its reserve for share buybacks through March 2017 to $200 billion and has been extremely active in this area. With healthy cash flows and a strong balance sheet, it’s only logical that the company would seek to increase value for its shareholders by boosting earnings per share. More importantly, it provides a valuable-cushioning mechanism for stock volatility and creates potential upside for the stock.

Last quarter, the company bought back 31 million of its own shares in the open market and 38 million more shares directly from big financial institutions, arguably breaking at least some of the fall from the dumping of shares by many large investors.

That’s good news for two reasons. First, the company’s willingness to repurchase its shares provides a necessary counterparty for wholesale sellers, who could otherwise crash the market with an excess of supply. Second, a decrease in the number of shares pushes up earnings per share for the remaining investors and at the same price-to-earnings ratio can give the stock a bump. If the market continues to value Apple at the same multiple, higher earnings would mean a higher price.

Of course, there are risks. Apple’s price-to-earnings ratio isn’t static; it depends on several factors, including weighted-average number of shares over time, the price at which buybacks are executed, and the market’s view of potential earnings in the future. Those earnings could be hurt by countless other factors, including a decline in the popularity of the iPhone (unlikely but possible), poor performance by new products like the Apple Watch, lack of traction by Apple Music to compete with Spotify, a commercial failure of Apple’s self-driving car project, prolonged softness in the Chinese market, and other things.

But in the meantime, at a pretty modest 12.7 times price-to-2015-earnings ratio, the stock seems like a good investment. Particularly if you consider that other technology companies like Facebook (FB) are trading at substantially higher levels.

S. Kumar is a tech and business commentator. He has worked in technology, media, and telecom investment banking. He does not own any shares of the companies mentioned in this article.

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