To no one’s surprise, Apple Inc.‘s (AAPL) iPhone sales dropped in the fourth quarter for the first time ever — and AAPL stock shrugged on the news.
As well it should, too. If this eventuality wasn’t already reflected in the share price, the market wasn’t doing its job.
We’ve known about flagging iPhone sales for months. The iPhone 6s and iPhone 6s Plus weren’t flops by any means. They simply weren’t as popular (make that wildly popular) as last year’s models. Tough year-over-year comparisons are responsible for the decline.
Now, that doesn’t mean this isn’t a serious headwind for AAPL stock. Just look what iPhone worries have done to shares over the last three months, a period in which they’ve lost more than 13% of their value.
But the market, as always, is forward-looking. Investors might have to fine tune their expectations based on these more specific market research reports. Perhaps the decline was a bit more than the market expected. That said, the general effect should be already discounted in AAPL stock.
For the record, iPhone sales in the fourth quarter fell 4.4%, according to technology research company Gartner. That led to a decline in iPhone market share to 17.7% from 20.4% in the year-ago quarter.
AAPL Stock: Codependent on iPhone
The iPhone business is by far and away Apple’s most important endeavor. Anything that indicates deceleration in that segment is going to spook the market badly. Some folks fret that Apple has lost its mojo.
Maybe, maybe not. What the market appears to be forgetting is that Apple has been here before. Growth was anemic before we got the iPhone 5s.
And then it came back.
Besides, AAPL isn’t valued like a growth stock, anyway. Heck, investors are willing to pay only 9.8 times forward earnings for AAPL stock. That’s cheaper than utilities and telecommunications stocks, neither of which are known for spectacular growth.
It’s true, the days of turbocharged growth might be behind Apple. The law of large numbers catches up to everyone.
However, that doesn’t mean profit has to decline over the next few years. Indeed, analysts, on average, figure Apple has a long-term growth rate of nearly 12% per year.
AAPL stock’s forward earnings multiple is far too low to reflect that growth potential.
You can see this in action in AAPL stock’s price-earnings-to-growth multiple. Known as PEG, this metric shows how fast a stock is rising relative to the company’s growth prospects.
For context, the S&P 500 has a PEG ratio of 1.6, according to Yardeni Research. At 0.9, Apple’s PEG is almost half that value, according to data from Thomson Reuters.
It seems anything to do with slower iPhone sales has been more than discounted in AAPL stock. On valuation alone, the tech giant is a buy.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
