After it was confirmed that Donald Trump would be the next president-elect, stocks in the technology sector took a hit as cash flow revitalized other neglected areas of the market. Healthcare and industrials in particular perked up while Wall Street darlings like Apple Inc. (NASDAQ:AAPL) sagged.
But I don’t think this is indicative of a larger trend. In fact, I think AAPL stock just might see a strong comeback as we head into the New Year.
It’s clear that Apple is finding relief from the sweet spot in its phone upgrade cycle. Despite a barrage of criticisms about the removal of the headphone jack, the iPhone 7 sold out almost immediately and has been essentially backordered until now, so I think it’s fair to count the launch as a success.
If the momentum continues, 2017 could turn into a welcome rebuilding year for the company.
I also think the prospect of Trump-motivated trade walls cutting into AAPL’s margins is overstated. At most, labor only contributes 2% to the build cost of an iPhone — so even if the company ends up paying a hefty import tax to repatriate Chinese-made products, iPhones will still be the most profitable smartphones around.
All in all, the long-term models should remain intact regardless of what moves the Trump administration makes.
And those long-term models currently indicate that it’s going to be a decent couple of years for AAPL stock. Growth probably won’t be dramatic because, as I’ve argued before, it takes a lot of moonshots to do more than budge the numbers from the existing business. The iPod and iPhone changed this company into something magnificent, but the last of those game-changing products is now a decade old. We can speculate about everything from smart cars to smart homes, but it’s going to take AAPL a few years to ramp up to a sliver of its current cash flow.
Nonetheless, as long as it can maintain the status quo and retain its customer base with each new phone cycle, the company’s future looks bright.
So what we have is a consumer electronics company that uses its powerful brand to offset continued pressure on pricing. By industry standards, Apple stock is an extremely profitable competitor, and Trump’s trade proposals aren’t going to make that go away.
Plus, of the $2 trillion in U.S. corporate cash parked overseas, around $230 billion belongs to AAPL shareholders. Bringing that money home could unlock transformative mergers and acquisitions, big buybacks, a truly extraordinary dividend or all of the above. That leaves a lot of potential for AAPL to make huge leaps and bounds in value if any new tax legislation gets pushed through.
AAPL hasn’t been a true “growth” company for years. It’s a value play now, with a grown-up 2.1% dividend and a forward multiple of barely 11X earnings. That means any action we see in the short term must be viewed in the context of a larger trend, so the smaller dips don’t matter as much as long as the company’s fundamentals are solid. And AAPL is as solid as they come.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
