Can Apple Inc. Snap Out of Its Growth Slowdown?

Snap seems like an ideal boost for Apple stock - but don't expect it to pay off immediately

By Ian Bezek, InvestorPlace Contributor

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Source: Apple

Remember when Apple Inc. (NASDAQ:AAPL) stock slumped to as low as $155 just last month? Yeah, me neither. Apple stock is back in rally mode. Investors have bid Apple up to fresh all-time highs at the $182 mark to start the week. But don’t let the price action fool you — not all is well for the company.

Apple’s Homepod sales have been “underwhelming.” Questionable sales momentum at various Apple suppliers suggest demand for the new lines of iPhones aren’t quite hitting expectations either. Analysts forecast Apple’s earnings to grow 30% this year — far ahead of the 8% average that the company has posted over the past five years. But it seems like Apple may come up short on the earnings front if the iPhone X doesn’t meet analysts’ lofty forecasts.

Apple Stock’s Slowing Momentum

Apple is now a mature tech company, rather than a flashy growth name. Still, at 18x trailing and 14x forward earnings, Apple stock is still priced for a reasonable amount of growth. The market tends to not want to pay more than 10-12x earnings once a company stops growing. Thus, if Apple’s growth totally stalled out, AAPL would be significantly overvalued at these levels. So, while the company doesn’t need double-digit earnings growth, it needs to keep moving the ball forward to some degree.

Over the past five years, the company has grown both sales and earnings by 8% per year compounded. That sounds good.

However, things look significantly different once you back out the effects of the share buyback. Once you strip that out, the company’s earnings growth rate falls to the low single digits compounded. In fact, since 2012, the company’s net income is only up from $42 billion to $50 billion — a 20% increase over five years isn’t much to brag about.

None of this is to take anything away from Apple’s management. They’ve done a great job over the years. It’s obviously a wonderful problem to have when your sales base is so large that it is hard to expand further. That said, Wall Street demands growth, at least for a stock like Apple that is at fresh all-time highs. And nowadays, the company’s earnings growth is largely coming just from its share buyback. That can’t be sustained forever.

Snap and Apple Stock

One way out of this growth slowdown is to make acquisitions. Apple’s treasury is better endowed than the central banks of many countries. Apple can buy pretty much anything it wants without having to take on a prohibitive amount of debt. And given Apple’s struggles to produce organic in-house growth, an acquisition is a natural way to get the company’s momentum back.

That brings us to Snap Inc (NYSE:SNAP). Nick Bilton of Vanity Fair suggested last week that Apple may want to buy out Snap. Here’s the crux of Bilton’s argument:

[F]rom a business perspective, such a partnership would make sense for both companies, perhaps more than any speculative partnership that I’ve heard about in years. For Apple, Snap could offer value on multiple levels. Beyond iMessages, which some see as a sort-of inclusionary social network, Apple doesn’t have a foothold of any kind in the space. (And, as anyone who recalls Ping well knows, that’s not for lack of trying.) Like Snap, Apple covets teens. Apple and Snap also have a common competitor in Facebook Inc (NASDAQ:FB), which Apple may begrudgingly need (it’s one of the reasons people are so addicted to its phones) and Snap straight up hates for consistently copying its product features.

This all makes a lot of sense. Apple has struggled to get much success in social media. While its phones and laptops are still the go-to products for adults in their space, Apple needs to make sure the next generation comes along with the same brand loyalty. As Jobs’ halo starts to fade, Apple needs to take proactive steps to keep its image above more generic consumer tech companies.

The point about a shared adversary, Facebook, is also a strong one. Facebook has made many moves in recent months that seem to only serve the purpose of copying or heading off moves by Snap. Under Apple’s ownership, it’d be far harder for Facebook to pick on Snap. It is simply too small as a standalone entity to win that fight today.

Do Numbers Work for Apple Stock?

With Apple’s $300 billion cash hoard, Snap would be an easy enough acquisition. The company’s market cap is in the low $20 billion range. Throw a 50% premium buyout on it, and Apple could buy it for $30-$35 billion. Is that overpaying though? Facebook made its key acquisitions, such as Instagram, for a far lower price.

There’s also the matter that Snap has minimal revenues, as of yet. Over the past year, Snap generated just $825 million in sales. That’s fine enough for an emerging growth company, but it is peanuts to Apple. Apple did $239 billion in sales last year, meaning that Snap would add less than 1% to Apple’s annual sales going forward.

Of course you can make the same argument for other successful acquisitions. Instagram wasn’t meaningfully monetized at the point Facebook bought it. Given Apple’s global reach and pre-existing relations with advertisers, it would almost certainly be able to drive a lot more revenues out of Snap’s existing users. And giving Snap’s apps preferential placement on hardware would be a major boost going forward. While the deal would hit Apple’s price-earnings ratio in the short-run, it could be a real winner in the longer-term.

Verdict on Apple Stock

Regardless of whether or not Apple makes a move for Snap, it won’t change the company’s trajectory in the short-term. Like Facebook’s move for Instagram, we probably wouldn’t see huge results for at least a couple of years.

And in the shorter-term, Apple needs a bigger acquisition to really move the needle. Think something in the $100 billion range. Or if it chooses not to buy something large, it needs to ensure that the iPhone X remains a strong seller. Otherwise, Apple stock is likely to hit some turbulence as its share price has outpaced its earnings growth.

At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/can-apple-inc-aapl-stock-snap-growth-slowdown/.

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