9 reasons Apple’s stock will keep rising

Opinion: Everything seems to be working out as the tech giant is set to report earnings

Apple Inc. is a force on Wall Street, with a cult-like appeal for investors and consumers.

As such, I make a habit of checking in on Apple (NASDAQ:AAPL)  every three months or so. In December, I gave 10 reasons to buy Apple in this column; the stock is up 18% since then, double the S&P 500’s gain. After strong earnings in April, however, I warned there may be trouble on the horizon.

And now that Apple has tacked on about 30% in three months, the stakes are raised. So is Apple stock gathering steam, set to jump amid the company’s earnings report Thursday? Or is this big run over the last few months too much, too quickly?

While it may sound like a flip-flop after my take in April (or, maybe a flip-flop on April’s flip-flop from December?), I actually think Apple has more upside to come this year.

Here are a host of reasons why, and what to look for when the company reports earnings Thursday after the stock market closes:

Momentum: Let’s start here, because this is the name of the game for stocks like Apple. The shares are up 30% in the past three months, pushing above its 50-day moving average. The stock has surged 60% in the past year as the negativity that plagued Apple gave way to optimism. It’s reductive but true: Cult stocks like this go up because they’ve gone up.

Enterprise: The tech giant has long had a stranglehold on a modest group of consumers who have jumped head first into the Apple ecosystem. A recently announced partnership with IBM (NYSE:IBM)  will deliver a suite of business apps, cloud services and even enlist IBM as a sales force for Apple gadgets. Between this move, the slow death of BlackBerry (NASDAQ:BBRY) and untapped potential of the enterprise market, things are looking up for Apple as a supplier of business devices instead of just consumer gadgets. It will be crucial to watch enterprise performance metrics — Thursday’s report will provide clarity — but things are looking up.

Emerging markets: Apple’s biggest money maker is the iPhone, which accounts for about half of the company’s revenue. And the iPhone’s biggest opportunity lies in China, where Apple products are popular. If you recall, a big reason for Apple’s surge a few months ago was the strength in iPhone sales, thanks to double-digit growth in China . It’s also worth noting that Mac sales have been red hot in emerging markets, growing at a double-digit pace as PC sales decline. This kind of broad brand appeal will serve Apple well in regions like China and Latin America in the years ahead.

Profitable OS: Much is made about Google (NASDAQ:GOOG)  and Android’s market share of about 80% of global smartphone shipments. However, market share doesn’t equal profit share. Despite Google’s dominance, Apple raked in $10 billion in App Store sales last year, more than about $1.3 billion for Google Play. That’s a huge margin. Furthermore, Adobe (NASDAQ:ADBE)  broke down recent Christmas e-commerce trends a few months ago, and Apple was the runaway winner among mobile shoppers. According to Adobe, “iOS-based devices drove more than $543 million in online sales, with iPad taking a 77% share. Android-based devices were responsible for $148 million in online sales, a 4.9% share of mobile-driven online sales.” Say what you want about scale, but Apple clearly knows how to get people to spend money on its devices, meaning simply comparing device shipments grossly underestimates Apple’s potential.

Cash king: Apple boasted $53.6 billion in operating cash flow last year, and counts over $150 billion in cash and investments. When it comes to a balance sheet, Apple has perhaps the widest moat of any company on Wall Street. Of course, the cash stockpile as of March was actually down from the beginning of the year, so it will be informative to get an update.

Deal potential: Apple recorded its biggest deal this year with the purchase of Beats for $3 billion. That shows Apple isn’t afraid to spend in the Tim Cook era, even if his predecessor, Steve Jobs, was averse to buyouts and external talent. The Beats deal may not transform the business, but considering the company moved $1.5 billion in sales last year, it seems very likely to pay for itself via high-end accessory sales packed with Apple’s gadget power. These kinds of deals are necessary for a company of Apple’s size to keep growing.

Buybacks: That big cash stockpile didn’t shrink much on the Beats deal. That’s because the price tag is dwarfed by the $90 billion allocated to share buybacks as of a few months ago. Sure, that’s way above cash flow and a big chunk of the outstanding cash, but at current pricing, that will suck up almost 16% of Apple stock outstanding. That’s a huge boost to shareholders as it will fuel earnings per share growth. The buybacks could even provide a tailwind in Thursday’s report.

Dividends: While we are on the topic of delivering cash to shareholders, Apple last quarter increased its dividend to 47 cents per share (split adjusted). That increases the yield to a modest 2% on current pricing. However, dividends are still a mere 30% of projected profits for fiscal 2014. That means Apple can continue to increase its dividend even if future profits don’t grow — which they surely will — and without dipping into that copious cash stockpile.

Rotation to quality: One of the big stories in 2014 has been the flight from risky momentum stocks, be they 3D printers or biotechs or fashionable IPOs that have flamed out. Apple is a real company, with real profits, and investors have been seeking out this kind of investment lately over riskier alternatives. The rally among old tech stocks has been conspicuous this year, with some of the market leaders being semiconductor plays like Micron Technology (NASDAQ:MU) and Intel (NASDAQ:INTC) . If you’re looking for tech exposure, you could do worse than a mega-cap tech company like Apple. Sure, innovation remains a challenge and that buzzword “disruption” gives some the heebie-jeebies. But most investors would take an entrenched smartphone giant like Apple over a cash-bleeding cloud IPO seven days a week.

By Jeff Reeves, MarketWatch