Apple investors got an early Christmas present after the tech giant inked an agreement over the weekend to supply iPhones to the world's largest mobile network. Yet we think Apple stock is the gift that will keep on giving in 2014.
Late Sunday, Apple (ticker: AAPL) announced that it had reached a multiyear agreement with China Mobile (CHL) to supply it with its iPhone 5s and iPhone 5c. The deal, half a year in the making, will put iPhones in both Apple and China Mobile retail stores throughout China starting January 17, although China Mobile will start accepting preorders later this week. The companies haven't disclosed pricing yet.
The stock was up 3% to $564.90 in morning trading on the news, but it's not too late for investors to get a bargain.
Apple's deal with China Mobile is undeniably an important breakthrough for the iPhone maker as it gives it greater access to one of the largest and fastest-growing markets in the world. China Mobile boasts 763 million subscribers, nearly two-thirds of the wireless users in China, a country that has already shown great interest in Apple products.
China Mobile was one of the last major carriers in the world not to offer the iPhone, and the much-anticipated agreement should allow Apple to finally make some better headway into a nation that has largely been dominated Samsung Electronics and a number of local brands.
The increased sales should be meaningful for Apple in the new year: Piper Jaffray's Gene Munster expects the deal will add 17 million iPhone units next year, a figure that isn't included in most of the Street's estimates right now. With an average selling price of $525 in China, those 17 million units would add 5% to the current consensus revenue estimates for 2014, he writes.
Other analysts see even greater sales volume, with some estimates close to 25 million units; but even modest results should bring meaningful sales growth. In addition, Susquehanna analyst Chris Caso notes that "a large number of unlocked iPhones already operate on the China Mobile network using GSM voice and WiFi data -- but since those phones aren't able to access China Mobile's cellular network, we think all of those phones represent potential upgrades."
The iPhone is the gateway device to greater adoption of Apple products, notes Global Equities Research analyst Trip Chowdhry. "[The] iPhone is the anchor product that brings the customers into the Apple Family: Depending on the geography, 40% to 60% of iPhone users also become iPad user[s], and about 20% of iPad users become Mac users."
Yet even with today's pop, Apple shares look remarkably cheap. The stock trades at less than 12 times forward earnings, despite an industry-beating 12.3% long-term earnings-growth rate, a 2.2% yield, and $100 billion in combined share repurchases and dividends through 2015.
And the China Mobile deal should continue to pay dividends. China Mobile plans to add 500,000 4G base stations in calendar 2014 and has said it hopes to sell 100 million 4G smartphones in the same period -- an ambitious goal to be sure, but a measure of their commitment to supporting 4G, a tailwind for Apple sales going forward. FBN Securities Shebly Seyrafi boosted his Apple target price by $25 to $650 Monday, as he estimates that the percentage of 3G and 4G subscribers out of China Mobile's customer base should rise from 22% in the third quarter of this year to 35% by the end of next year.
Overall, Apple's deal with China Mobile may have been a long time coming, but it should also reward shareholders for a long time to come.
E-mail: teresa.rivas@barrons.com
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