Apple (AAPL) is a dilemma for current and prospective stockholders. With the constant fear of slowing growth in its iPhone business, those mulling a position in AAPL stock simply can’t make up their minds.
Apple shares have been on one heck of a ride over the past couple of months, bombing more than 20% between its July peak and the “Black Monday” late-August bottom before rebounding 10% to its current perch.
All told, Apple still is in the midst of a 10%-plus dip from that July high.
The question investors are trying to figure out: Should they sell the stock before a potential slowdown in iPhone sales — or should AAPL stock be given the benefit of the doubt, with a buy at every low … including this one?
Here’s my argument for the latter.
Don’t Underestimate the iPhone
Of course, investors’ biggest concern is that iPhone sales account for roughly 70% of Apple’s revenue. That means, very broadly, that if the iPhone loses its allure and sales begin to decline, then — as happened for BlackBerry (BBRY) — AAPL stock will be worth much less.
And that’s true — an iPhone decline is the biggest risk for AAPL stock. But emphasis should be on risk. It’s not an actual problem yet.
Some investors fail to realize that when Samsung (SSNLF) sells a Galaxy, it’s selling a quality phone, but when Apple sells an iPhone, it’s selling Apple. There’s a huge difference.
The iPhone offers consumers a gateway to the entire Apple “ecosystem.” That covers a broad range of products — from its content world to Apple TV to iTunes to its desktop environment.
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Still, investors in AAPL stock just can’t seem to get away from that fear. Thus with each and every iPhone cycle, as illustrated in the chart to the right, the unease grows and investors’ hearts skip a beat.
But this same cycle — which currently is instilling fear that iPhone’s magic is gone — might soon disappear.
Apple recently announced the iPhone upgrade program, which will allow consumers (for a highly affordable $32 a month) to annually upgrade an existing iPhone. So the roller-coaster ride in sales might eventually transform into a stable curve and eliminate the uncertainty for AAPL shareholders.
Apple management, it seems, has tackled Apple stockholders’ worst fears with laser-like precision.
And to put a cherry on top, Apple has released an Android app that will easily and smoothly allow the transfer of valuable data. For Android phone users, that makes the transition to the iPhone much easier and much more appealing.
AAPL Stock Under the Hood
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It’s true that iPhone sales, in terms of shipment, have been disappointing. However, when we examine revenue and net income growth (excluding tax), what we don’t see is a company in distress.
As the accompanying chart shows, Apple is still growing robustly.
All the while, AAPL stock is trading at 13 times trailing earnings, while the S&P 500’s P/E sits around 20. That is roughly a 35% discount for a company that grows faster than most S&P 500 constituents.
Bottom Line
Of course, the conclusion has to be this — Apple stock is a buy on any dips.
This month’s announcement on the Apple TV, the new iPhone upgrade program and the powerful new iPad address many earlier concerns I had for AAPL stock.
And Apple’s newly discounted valuation? It just means that, as usual, AAPL investors underestimate the deep understanding Apple has of its users and its ability to keep them excited.
And as long as Apple fans are more excited about the company than investors, Apple stock will head higher.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
