Market Analysis: AAPL 5/21/2014

Here's why AAPL Stock is on the rise

While Apple's still down $100 from its all-time high of $705, it has recovered more than 50% from a low below $400 less than a year ago. The stock's comeback is not only notable, but also incredibly rewarding for investors who bought near $400. Here's the backstory on Apple stock's rebound to $600 in three charts.

First, the chart itself of Apple's decline and subsequent turnaround in the past few years:

 While the volatility of Apple stock during the last few years is the first thing that likely jumps to viewers of the chart above, there is a bigger story in the chart: Even though Apple stock is still down meaningfully from an all-time high of $705, the buy-and-hold approach for long-term Apple investors has still made out to be a winning strategy. Apple stock is up 55% in the last two-and-a-half years and the S&P 500 is only up 51%. Zoom out five years and Apple stock is up almost 400% while the S&P 500 has gained just 113%.

Two reasons for volatility 

 The other two charts show two possible reasons for the volatility in Apple's stock price. First, consider the fall of Apple's year-over-year net income growth rates.

While the falling year-over-year revenue growth rates jump out as the most notable trend in the chart above, it's the recent revival of growth from the flat growth in Apple's third fiscal quarter of 2013 that has helped investors regain confidence in the company. Though Apple stock is still priced conservatively at $600, investors are going to want to see at least some revenue growth in the coming years to help the stock appreciate meaningfully. Share repurchases will help, but revenue growth will make it even easier for Apple to grow earnings per share. 

The second potential fundamental driver to the volatility of Apple's stock in the past several years is likely its gross profit margin story. 

Just around when Apple stock peaked, so did Apple's gross profit margin. But then a subsequent launch of a higher-cost iPhone lineup and pricing pressure from the Apple's iPad Mini sent the important metric spiraling downward. As profit margins started to decline, investors wondered where the bottom would be. 

Fortunately, Apple's gross profit margin decline bottomed at an impressive level. Even more, continued pricing power that goes contrary to the industry trends of declining average selling prices in tablets and smartphones has enabled Apple to begin an upward march in its gross profit margin recently. In Q2, Apple posted an impressive gross profit margin of 39.3%, almost 2 percentage points higher than the year-ago quarter. 

Even though Apple stock has soared higher in the past year, it still may be a good time for investors interested in the stock to buy shares or add to their position. Sure, the stock has already recovered significantly, but it still trades at just 14.5 times earnings. With the help of rising revenue, a robust gross profit margin, and a shareholder-friendly program for returning cash to shareholders, Apple looks poised to provide investors meaningful returns over the long haul.