The death of the iPhone has been greatly exaggerated, which makes Apple Inc.’s (NASDAQ:AAPL) latest slide yet another chance to pick up a high-quality stock on sale.
AAPL stock tumbled in after-market action following its late Tuesday earnings report. Cooler heads prevailed during the following regular session — Apple pared some of its losses in morning trades — but it still finished off by more than 2%.
For a company with a market cap of $615 billion — and a component of the Dow Jones Industrial Average to boot — that’s no small thing.
The selloff in AAPL stock has nothing to do with the company’s first annual decline in profits since 2001. The market knew that was coming. Rather, it all goes back to continuing worries about the company’s over-reliance on the iPhone.
The smartphone market is pretty covered in developed countries and people are upgraded their headsets less frequently. With no game-changing hit comparable to iPhone almost a decade ago, it is indeed a very real possibility that Apple will never return to the growth profile it was once famous for.
And that’s OK.
Apple stock already factors all this in — and more. It’s too big a deal when an analyst says AAPL is no longer a growth stock. It’s not valued like one anyway. Apple gets too little credit for the growth prospects it does have, as well as the roughly quarter-trillion-dollar cash hoard it has stashed away the U.S. and overseas.
AAPL Stock Is a Bargain
Apple stock trades for a bit more than 11 times forward earnings. You could say that’s reasonable for a projected compound annual growth rate of not quite 8%.
But what investors are willing to pay for future earnings is subjective, and on a relative basis, they’re being too cheap with AAPL stock. After all, the S&P 500 gets a forward price-to-earning multiple of 18 with a growth rate of around 6%.
Or compare what investors are willing to pay for stocks with the pokiest of growth in their futures. The telecommunications sector of the S&P 500 gets a forward P/E of 13, or almost a 20% premium to Apple stock. Utilities — which do look overpriced — go for 17 times forward earnings. That’s a whopping 50%-plus premium to AAPL stock’s valuation!
As an aside, investors are piling into those defensive sectors for the generous dividend because interest rates are so low. Ironically, Apple could probably get a higher earnings multiple if it doubled its dividend.
At any rate, investors are willing to pay up for stocks — just not AAPL. That’s a mistake, though, because the iPhone still has some juice left.
Apple actually was caught off guard by higher-expected-demand for iPhone 7, which was supposed to be just a place-holder before it wowed everyone with iPhone 8 next year.
The iPhone Is Resilient
With more demand than supply, Apple is struggling to keep up. No, that’s not good for sales in the upcoming holiday selling season, but it does indicate that iPhone still has at least some mojo. If anything, it probably means the bottom of the iPhone cycle has passed.
From Credit Suisse analysts who have Apple at “Outperform” (or buy, essentially):
“Fundamentally we believe our thesis remains intact with the iPhone 7 driving the business back to growth followed by an iPhone 8 super cycle. LT, given high retention rates, a superior ecosystem, and a multi-product compute advantage, we believe FCF of ~$67bn should be sustainable…Our installed base analysis suggests strong growth in 2018 driven by an iPhone 8 super cycle, SE strength, and an aging installed base …”
A lot of this investment thesis depends on iPhone 8 being a rejuvenating hit next year. Apple also has to show that it has growth drivers beyond iPhone.
After all, part of the reason that AAPL stock gets a low multiple is fear that it’s a one-trick pony. But all of that is arguably baked into the share price already. The market values AAPL as if it were a telco or a utility, which is just weird.
Apple has too much growth left — and too much cash flow — for that to last forever.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.