It should be no surprise that Apple Inc. (NASDAQ:AAPL) has been the first of the big technology companies to roll over to the downside.
Even with its fall of $12 per share since June 9, shares still trade at a price-to-earnings ratio of 16.8, much higher than the low teens investors had seen since its 7:1 stock split in 2014. The yield, even with a dividend of 63 cents per share, well-supported by earnings, is just 1.75%.
Apple revenue peaked in 2015, and is not expected to beat that year’s $233 billion in 2017. At a market cap of $749 billion, investors are paying 18.5 times the annual operating cash flow of $40 billion. Take out some zeroes and it looks like an ordinary company.
The bigger reason for the fall-off is more prosaic; Apple is caught between a rock and a hard place.
Devices and Services
The rock is the retail price of its products, specifically its flagship iPhone. Apple strictly polices discounters. You pay the same for an iPhone at Wal-Mart Stores Inc (NYSE:WMT) as at the Apple store. Current products are priced at $650-750.
So, while Apple has more than half of the “high-end” market, defined as phones over $400, phones running Android from Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) have nearly 90% of the global market.
Apple has begun assembling some of its phones in India, selling them for slightly less than $350. But, these are iPhone SE models, they’re two-year old technology. A poll has found 38% of Indian users would prefer to upgrade to an iPhone 8 if they had the cash.
Apple has also been refurbishing its devices and reselling them at lower prices, and allowing some discounts on older equipment. But, none of this is making a big dent in the reality. AAPL is like a BMW in a world that has become used to Volkswagens.
This, in turn, limits potential service revenue. Apple sees services as key to future growth. It was 13% of revenue in the first quarter this year, and management expects that to reach 21% of revenue, growing 18% per year.
Services could grow faster if Apple had a bigger share in hardware, but it can’t increase that share substantially without cutting prices, thus margins.
That is the dilemma.
Analyst Downgrades
None of this is a secret to those following AAPL stock. It’s also why 12 of the 44 analysts following Apple have listed it as a hold or even a sell, against 27 who rate it a buy and five who call it “overweight.”
Analysts estimate Apple will earn $10.47 per share this year and $13.94 per share next year. Its most spectacular growth days seem behind it, thanks in part to the law of large numbers (big numbers are harder to grow than little ones).
Our Chris MacDonald says Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK-A) remains bullish on Apple, but that he will be “buying on dips,” (like the ones a few weeks ago) where AAPL stock is fully priced. He began buying in 2016 at $90 per share. Frankly, I’ve done better in Apple than he has.
The Bottom Line for Apple Stock
Apple is a mature company. It is as vital to our economy as Exxon Mobil Corporation (NYSE:XOM) was in the 1970s, or General Motors Company (NYSE:GM) in the 1950s, or General Electric Company (NYSE:GE) was in the 1920s. But, it is still a mature company.
Mature companies are not growth companies, though. They are decent stocks, not high-flyers. They are core holdings, but they’re not where you look for big growth in your portfolio.
Apple’s problem is simple — it’s all grown up. I’m waiting for a bigger dip to buy back in.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
