The million dollar question for investors when it comes to the world’s only $522 billion company is whether Apple Inc. (AAPL) stock is a value or a value trap. There’s a compelling argument to be made for both sides.
Unfortunately, as is often the case in life, reality is not quite so black and white.
Is Apple (AAPL) Cheap?
Yes, AAPL stock is cheap pretty much any way you look at it. Apple has a price-to-earnings ratio of 10.6 and a forward P/E of 10.6.
Not only are those numbers significantly below the 23.7 P/E ratio of the S&P 500 and the 25.9 P/E of the technology sector, they are well short of the respective valuation ratios of large-cap tech peers Alphabet Inc (GOOG, GOOGL), Facebook Inc (FB), Amazon.com, Inc. (AMZN) and Netflix, Inc. (NFLX).
Even when you look at price-to-operating-cash-flow or price-to-free-cash-flow, AAPL is still the gold standard of the bunch. Apple has a 2.4% dividend yield, it has more than $220 billion in cash on its balance sheet, and it has the most successful product in the history of products: the iPhone.
It’s very hard to argue that AAPL stock isn’t a great bargain by any other standards other than those of the world’s largest and most actively owned stock.
Is Apple (AAPL) Stock a Value Trap?
There is certainly an alternative argument that AAPL is a value trap as well. AAPL has a number of successful products and services, but the iPhone may be the single most successful product of any kind in the history of products. Roughly two-thirds of AAPL’s revenue comes from the iPhone.
It’s only recently that AAPL has seriously started running into market saturation problems. In the first quarter of 2016, iPhone shipments totaled 51.2 million, well short of the 61.2 million shipped in Q1 of 2015.
With sales finally peaking, the question is what does AAPL have to replace the iPhone? The Apple Watch has had limited success, but so far it’s no iPhone.
AAPL is reportedly dabbling in virtual reality. Maybe the company will come up with a must-have VR product, but it’s hard to imagine anything close to the scale of the iPhone.
AAPL is also reportedly working on an electric car. But with competition from Tesla Motors Inc (TSLA), Alphabet and the traditional auto makers, it seems far from a guarantee that Apple stock will end up a dominant force in the auto industry within the next decade or two.
AAPL may also be transitioning from a hardware company to a subscription-based software company. That change may end up being the company’s saving grace, but it is also a major undertaking with plenty of risk and uncertainty.
What’s the Verdict on AAPL Stock?
Whether or not AAPL stock is a value trap is a complicated question. Yes, the stock is cheap, but the same could be said of Blackberry Ltd (BBRY) throughout most of its fall from grace.
Maybe the iPhone 7 and/or the iPhone 8 will be such a cool device that sales will get another big boost and swing back into positive territory, but how long will that boost last? Apple’s relatively low share price and valuation seem to have already priced in a certain degree of market skepticism about the company’s future. In that respect, it’s unlikely that the stock has significant downside in the near-term at least.
And selling more than 50 million devices per quarter means that the iPhone is still an incredibly successful product that AAPL will be able to milk for years to come. Unfortunately, the growth phase of the iPhone may finally be over.
It’s now up to Tim Cook and crew to come up with the next revolutionary AAPL product or service with long-term growth potential. If they can’t, Apple stock is probably headed lower in the long term no matter how cheap it is today.
As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.