It’s been a trying year for investors in Apple Inc. (NASDAQ:AAPL). After a remarkable run over the past decade, the company’s steady climb stalled out in 2015. Apple’s revenue flatlined, and AAPL stock dropped sharply from the $125/share level.
The most difficult stretch appears to have passed, though. The company has put up sound quarterly results, and AAPL stock moved solidly back over the $100 mark. However, the company still has serious problems in China, so unless a big new hit product arrives, Apple’s frenetic growth days are probably finished. But, at least for value-orientated investors, AAPL stock might represent a good choice at current prices.
AAPL Stock Pros
Good Quarter: Apple saw its biggest one-day jump in two years following earnings. Both revenue and net income beat expectations. The company is still in a slow patch; revenue declined 14% year over year. However, the market anticipated worse, so Apple stock got a solid relief rally on the results. The sense is that everything bad happening now is already factored into the share price, and that things will only get better from here.
One positive note was that Apple’s cash pile actually declined slightly. Instead of the just letting cash stack up, producing minimal returns, management has been investing in some venture capital-type opportunities such as Didi. In addition, AAPL is aggressively returning capital to shareholders.
Still Looks Cheap: The big argument for AAPL stock lately is that it is attractively priced. That is particularly true when you compare it to the broader stock market. Even with the rally following the earnings beat, Apple stock still trades at just 12x earnings. The company also offers a fast-growing dividend, and AAPL stock currently yields more than 2%.
As growth prospects dimmed, the market really slashed Apple’s valuation. You can argue that this is overdone, as 12x earnings is quite low. The S&P 500, by comparison, currently trades at more than 20x earnings. AAPL probably doesn’t deserve to trade at the market multiple, since it doesn’t have great growth prospects. However, even a re-rating to 15x earnings would provide substantial gains in the share price.
Big Innovation Coming? Apple’s R&D budget has surged over the past year. Research spending is up by one-third recently, compared to the same period last year. Tim Cook commented that, “There is quite a bit of investment in products and services that are not currently shipping,” which seems like a clue that something is in the works.
After the fairly uneventful Apple Watch, many investors lost hope that AAPL could deliver another big hit. But, Apple has an admirable track record, and you can be sure that Cook is looking to launch a big hit product of his own to help escape from Steve Jobs’ shadow.
AAPL Stock Cons
iPhone 7 May Disappoint: Chatter for the iPhone 7 is not particularly positive at this point. It seems there will be little forward moment from last year’s models, either in design or the technology inside.
The talk is that Apple is saving the best features for the iPhone 8 launch, which is the one that’s supposed to build serious excitement for the brand again. However, by pushing a lot of the improvements into the iPhone 8, AAPL risks seeing fewer people upgrade in the interim.
Apple stock is unlikely to perform well prior to the launch of the iPhone 8 if the interim models aren’t sufficiently enticing to drive upgrades.
Too Big To Grow: Apple’s past growth put the company in an enviable position. It has huge cash reserves, massive revenue and a world-renowned brand. However, with that success comes a dark side. Like the famous ESPN magazine cover curse, it’s difficult for companies that have already made it to the top to keep outperforming. Mean reversion tends to kick in.
Apple is simply so large now that it is hard for the company to grow to a meaningful degree. The company’s $220 billion in annual revenue makes AAPL equal to a mid-sized national economy. To put it another way, in one quarter, Apple produces more GDP than Costa Rica does in an entire year.
For the company’s sales to double, it would have to reach the same level of revenue as Wal-Mart Stores, Inc. (NYSE:WMT), which seems like a tall order. That same doubling would make the Apple economy equal in size to the entire national economies of Poland, Sweden, or Argentina. That’s a big ask.
AAPL stock, to the extent that it produces returns, will be largely from stock buybacks and dividends rather than organic growth.
China Problems: Apple’s sales in China dropped 29% versus the previous quarter and 33% year over year. In numerical terms, sales dropped nearly $5 billion versus the same quarter in 2015. Apple has more than just regulatory problems at this point. The Chinese market is full of competitors that can beat Apple at its own game.
AAPL has fallen to fifth in smartphone market share in that country. On the high end of the market, phone makers such as Oppo and Huawei are making phones that match up favorably to the iPhone, offering features such as superior cameras and faster battery charging. On the low end of the market, Xiaomi‘s plan of copying Apple’s innovations and designs has garnered considerable mindshare among value-orientated consumers.
Verdict
Apple offers a decent dividend out of the tech sector. For conservative investors, there is real appeal here. However, AAPL stock will likely struggle to keep up with the S&P 500 in coming years. Its gargantuan size, lack of revenue growth, and ongoing problems in China represent serious headwinds. The dividend is nice, but I don’t see a whole lot of upside for AAPL stock in the near future.
At the time of this writing, Ian Bezek held no position in AAPL stock. He owns Wal-Mart. You can reach him on Twitter at @irbezek.
