Why Apple’s Rally Is Just Getting Started

Apple (NASDAQ: AAPL) is on a tear. After the much-anticipated release of the iPhone 7, Apple stock soared 10% just this week, as investors seem to be increasingly optimistic about what the future holds.
The new iPhone device could not come at a better time. Apple has had a difficult year, and is looking forward to better days ahead. This year has been marked by declining sales and earnings, due to extremely tough comparisons, the result of the success of the iPhone 6.
But with a new iPhone set for release, Apple should soon enter its next growth cycle. Apple stock is still cheap, which means the recent rally could have more room to run.

iPhone 7 Pre-Orders Soar

Buzz is building over the iPhone 7, which promises a number of advancements than the previous model. While the iPhone 7 looks the same as the iPhone 6, the new version has improved front and rear cameras, a faster chip to increase processing speed and a longer battery life.
In addition, the iPhone 7 will be water resistant with more onboard storage, and the iPhone 7 Plus contains dual cameras.
Apple stock has rallied considerably since the iPhone 7 announcement. Enthusiasm really started building when Apple announced it had sold out of the iPhone 7 Plus model worldwide, during the initial pre-order period.
On Wednesday, Apple shares rose 3%, marking three days in a row in which the stock was up at least 2% each day.
It is not hard to see why Apple stock would jump after the encouraging iPhone 7 news. The iPhone is Apple’s most important individual product, by a wide margin. The iPhone itself makes up more than half of Apple’s annual revenue.
And, the new iPhone will help Apple accelerate its growth in emerging markets like China, where the company has struggled to start the year. Due to the maturation of the iPhone 6 models, Apple’s sales in China dropped 29% last quarter.
Overall, Apple’s total revenue declined 7% through the first three quarters of its current fiscal year, compared with the same period the year before.
Fortunately, a new iPhone is just what Apple needs to reignite growth. Thanks to the hugely successful iPhone 6 and iPhone 6 Plus, sales in China soared 84% in Apple’s most recent fiscal year. This shows what a new iPhone model can do, which is why investors are bidding up the price of Apple stock.

Apple Stock: Indications of a Breakout

There could be more gains in store, because Apple still represents one of the market’s biggest bargains. It is a very cheap stock. Shares trade for 13 times Apple’s projected earnings per share over the upcoming year. On the basis of its forward P/E ratio, Apple is cheaper than the S&P 500.
On a trailing P/E basis, Apple is significantly cheaper than the S&P 500. The stock trades for a P/E of 13, compared with 20 for the overall market.
As a result, Apple’s valuation has room to expand. Even if Apple’s trailing P/E simply matched the market, it would imply a share price return of more than 50%.
Of course, Apple has rarely been valued on par with the S&P 500 over the past several years. Apple consistently holds a cheap valuation, partly because investors doubt whether it can continue growing. After all, Apple is the largest company in the world, with a market capitalization over $600 billion.
But, if the early news from iPhone 7 Plus pre-orders is any indication, there are encouraging signs that Apple can continue to grow. The stock added $60 billion of market value in the week after the iPhone 7 announcement, and if the sales momentum continues, the rally may just be getting started.
 
Disclosure: The author is long AAPL.