Shares in Apple Inc. (NASDAQ:AAPL) have been in a downtrend since the company’s earnings last week. But a quick look at both valuation and technical indicators strongly suggests Apple stock will bounce back soon and silence the bears.
Take a look at the chart below. AAPL stock tested its support at its 50-day moving average twice last summer — once in late July and once in early September. In both cases, shares bounced off the key level like it was a trampoline.
If the third time is a charm, Apple stock has about another 1.3% decline in it before it tests the 50-day moving average again.
A successful test isn’t guaranteed, of course. However, although Apple stock isn’t oversold, it is headed that way. And it’s trading at a similar relative strength index as it did during the last two successful tests.
In short, the signs are promising. But where to then?
The surprising popularity of the iPhone 7 is certainly a shot in the arm. And with shares up about 25% over the last three months, Apple stock could get a little extra boost thanks to window dressing. Plenty of fund managers looking to spruce up portfolios before year-end are happy to piggyback on any stock with strong momentum.
However, as AAPL shares trade from here to the end of fiscal 2016, the key remains iPhone in the shorter-term and valuation in the long run.
Both of those issues are probably more favorable than the market thinks.
Apple’s iPhone Resilience
One of the more pleasant surprises from Apple’s most recent earnings report was demand for the iPhone 7. AAPL 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.
Instead, it’s proving to be an important stepping stone to Apple’s next big thing. From Credit Suisse analysts:
“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 …”
These analysts have Apple stock at “Outperform” — essentially, a buy call.
Apple Stock Valuation
Some observers like to say that AAPL is no longer a growth stock. That’s not exactly a news flash if you look at how the market values it.
At 11.3 times forward earnings, Apple stock trades at a deep discount to the S&P 500. Furthermore, it trades at a discount to its five-year average price-to-earning multiple of 12.3. It’s even cheaper when considering price-to-sales.
To put things in perspective, Apple has a projected compound annual growth rate of almost 9%. You can justify a forward P/E of only 11 or 12 for that pace of growth. So on that basis, AAPL stock isn’t a screaming buy, but it is on the cheaper side of things.
More interesting is how Apple’s valuation compares to other stocks with similar growth prospects. It’s not hard to find stocks with weaker growth rates that get much higher P/Es. Partly that’s apples to organs. Telecommunications companies like AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) or any number of utilities — which are slow-to-no-growth names — are popular these days because of their generous dividends. In many cases, they get much higher P/Es, albeit look overpriced.
It does show that the market is willing to pay much more for growth. Heck, just look at the S&P 500, which trades at a PE of about 17 on lower growth rate than AAPL’s.
The point is that despite analysts’ overwhelming majority of buy calls on the name, sentiment on Apple stock is lukewarm at best. Happily, technical strength and under-appreciated iPhone resilience set AAPL up for multiple expansion, if only later rather than sooner.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
