Apple Inc. (AAPL) suffered its first sales decline in 13 years during its last quarter, and as a result, AAPL stock has since continued to fall to mark one of the worst periods of market capitalization losses in the company’s history.
The reason for this loss is its 13% decline in revenue last quarter, which illustrates just how quickly the problems have piled up for the world’s most valuable company.
However, things are not as bad as investors think for Apple. In fact, many of the beliefs regarding Apple’s sales decline last quarter are assumptions, and not considering the entire story. So with that I will say that these double-digit declines are no big concern for AAPL stock owners.
A Big Misconception About AAPL
At the epicenter of the investor’s problem with AAPL stock lies the notion that Apple is no longer growing. However, Apple’s growth rate right now is actually unchanged from the last four years.
For example, Apple grew total revenue by 9% in 2013 and 7% in 2014. Keep in mind that year-over-year revenue growth naturally declines as a company grows larger. Yet, in 2015, Apple grew a whopping 26% as it launched two devices (the iPhone 6 and 6 Plus), penetrated into new markets and the U.S. wireless industry adopted a new business strategy that allowed annual upgrades.
So, if you consider that revenue grew 26% last year and declined 13% in its last quarter, then the annualized growth rate for 2015 and 2016 has not really changed all that much from 2013 and 2014. Hence, the big growth-related losses that AAPL stock is realizing right now don’t actually apply.
That said, Apple could post a 13% sales decline all year and it would still maintain that same growth rate on a compound annualized basis because of the factors that caused 2015 to be so strong.
Fortunately, that is very unlikely to occur. Although the company’s latest products, iPhone SE and 9.7 inch iPad Pro, launched too late to have a material impact on Apple’s most recent quarter, AAPL will launch a new generation of iPhones later this year that are sure to catapult sales in comparison to this current year’s “S” refresh of the iPhone 6 and 6 Plus.
Things to be Bullish About
All things considered, one could argue that AAPL stock is better positioned today than it has been in many years. At 10x next year’s expected earnings per share, AAPL stock is at its cheapest point since late 2013.
Apple continues to grow on a compound annualized basis, with many bright spots to push AAPL stock higher long-term. For example, there might have been what seemed like weaknesses during Apple’s last quarter, but even during a tough comparable period last year, Apple’s Service revenue still grew 20% and sales in India skyrocketed 50%.
Keep in mind, India could be equivalent to China as a smartphone market, and that’s why Apple has made big investments to grow market share in the region. Currently, Apple has very little presence in India, but the fact that it grew so quickly suggests that its plan to grow market share is working.
With Services, investors have been demanding for years that Apple show innovation to create a revenue stream other than iPhones to drive the business forward. Services has become that business with $6 billion in revenue last quarter and 20% growth.
Best of all, most of the businesses like Apple Music, Apple Care, Apple Pay, iTunes and others are recurring revenue streams with high margins that monetize Apple’s leading ecosystem. This means Services can be highly valuable long-term, and should really standout towards the end of 2016 as the iPhone 7 rolls out and sparks year-over-year growth.
That said, China is a problem. It represented $12.5 billion in quarterly revenue, and sales declined 26%. The good news is that most of Apple’s China revenue up until this point came from China Mobile. The nation’s other two large telecom companies were not even approved for 4G use until late last year.
Therefore, as 4G networks are constructed, and AAPL products become more appealing to wireless customers excluding China Mobile, the declines in China should subside.
To conclude: Things are not as bad as they seem for Apple or AAPL stock, and investors should like both moving forward.
As of this writing, Brian Nichols was long Apple.